BOSTON | Thu., Feb. 9, 2012 12:24am EST (Reuters) - More U.S. workers with 401(k) plans are selecting or defaulting to simple target-date mutual funds, an investment strategy that took its lumps during the credit crisis, but have emerged with greater popularity.
Target-date funds, however, get mixed reviews from industry analysts who say some funds remain too aggressive even as investors near their retirement dates.
Investors can select funds with a given target date and the funds automatically rebalance stock and bond allocations over time. Bonds become more prevalent as the retirement date approaches.
Boston-based Fidelity Investments, the top 401(k) provider in the United States, said last week about one in four, or 26% of its participants had 100% of their 401(k) assets in target-date funds at the end of 2011. That's up from 21.4% during the same time in 2010 and 17.4% in 2009.
This snapshot is based on the company's 11.6 million 401(k) accounts, the largest in the industry. For example, Fidelity's target-date Freedom Funds had $131 billion in assets under management at the end of 2011, up from $126 billion in 2010.
"For many employees, with market volatility and lack of confidence in their own skills, they've actually found that target-date funds help them get some peace of mind," said Beth McHugh, a Fidelity vice president who analyzes customer trends.
But analysts say investors can be lulled into a false sense of security because some funds maintain heavy stock allocations in and around their target dates.
In fact, the percentage of equities at the target date appears to have increased to 43% in December 2010 from about 40% in December 2007, according to a study by BrightScope Inc. and Target Date Analytics LLC.
There is evidence, though, that more funds have adopted a more prudent management style after the 2008 credit crisis, the study said.
Joe Nagengast, a principal at Target Date Analytics, said target-date funds are good, especially for younger workers, because they do all the heavy lifting in the early accumulation years.
"But when you near retirement age, it's time to get out of off-the-shelf allocation," Nagengast said. "It's time to go see a professional adviser."
Fund companies are seeing rapid adoption of target-date portfolios among retirement savers, especially among new workers. T. Rowe Price Group Inc Chief Executive James Kennedy told Reuters in a recent interview that target-date funds have been a bright spot while his company's retail mutual funds business has been slow. T. Rowe reported last month that its mutual funds generated $2.2 billion of inflows in the fourth quarter, driven mainly by target-date funds.
The target-date fund industry got a big lift in 2006 when the Pension Protection Act allowed automatic enrollment into retirement plans and a U.S. Department of Labor regulation designated this all-in-one product as a default investment.
Target-date funds currently hold about $400 billion in assets and research firm BrightScope expects assets to hit $2 trillion by 2020.
Target-date funds are most popular with younger workers. For example, 67% of workers between the ages of 20 to 24 using Fidelity funds allocated 100% of their 401(k) assets to target-date portfolios.
During the height of the credit crisis, though, some target-date funds took a beating. Some funds designed for participants retiring in 2010 lost considerable value because of high exposure to stocks. In one case, a fund lost more than 40%, according to a 2011 report by the Government Accountability Office. The report said investors had no idea they could lose so much money that close to their retirement date.
It's also unclear if government policy encouraging the adoption of target-date funds actually improves the welfare of U.S. households.
Kent Smetters, a professor at the University of Pennsylvania's Wharton School, compared mistakes made by target-date funds to investing errors made by retail investors. In a May 2011 working paper for the National Bureau of Economic Research, Smetters and Jialun Li found Americans do a reasonable job of managing their own money.
"Households appear to be doing quite well and make only small mistakes at reasonable parameter values," the paper concluded. "Recent government attempts to simplify the investment process could very well leave many households worse off."
(Reporting By Tim McLaughlin; Editing by Walden Siew, Bernard Orr)
© 2010 Thomson Reuters. Click for Restrictions.
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