If target-date funds are supposed to get plan participants to their retirement goal, they should help protect participants as they get closer to retirement from bear markets that threaten their life’s hard work.
So how well do they do that?
The chart below details the peak-to-trough losses of the average target-date funds over the last 20 years versus the Defined Risk Strategy (DRS), a hedged equity approach that seeks to lessen the damage to portfolios during bear markets.
Source: Zephyr StyleADVISOR, Swan Global Investments
Of particular concern is the performance of the average Morningstar Target Date 2000-2010 fund during the 2007-08 correction, as represented by the yellow line in the graph above. These portfolios were some of the most conservative target-date funds available, positioned as appropriate for someone who was planning on retiring sometime between the year 2000 and 2010.
Yet when the credit crisis hit in 2007-08, these funds lost an average of 31.03%. They spent a full three years underwater before recovering their losses. Many Americans were hit doubly hard during this period, where their investment losses were paired with unemployment, stagnant wages, falling home values, or other financial challenges.
How likely were these investors to retire on time?
Contrast those losses with those of the DRS, which experiences much less pain during the major bear markets.