Target-Date Retirement Funds in U.S. Recover 2008 Losses, Morningstar Says

Target-date funds designed for investors retiring last year have recouped losses from the credit crisis, Morningstar Inc. (MORN) said.

The funds labeled 2010 gained 5 percent on average from U.S. stocks’ high in October 2007 through Feb. 17, the report said. The Standard & Poor’s 500 Index lost 7 percent over the same period.

Target-date funds, one of the most popular investment options in 401(k) retirement-savings plans, move money from riskier investments such as stocks to more conservative alternatives like bonds as an investor reaches retirement. The funds took in $47.5 billion in 2010 as total assets rose to $341 billion, an increase of 22 percent, the report released today said.

“It doesn’t refute the fact that if you were planning to start withdrawing your money around 2008 or 2009 that you would be hurt,” said Josh Charlson, senior mutual-fund analyst for the Chicago-based research firm. “It lessens the sting.”

The 2010 funds lost 37 percent on average during the decline of U.S. stocks from October 2007 to March 2009, the report said.

Regulators and legislators have scrutinized the funds’ fees, disclosures and risk structure after some lost as much as 42 percent in 2008, Morningstar said, while the S&P 500 dropped 37 percent.

Fidelity Investments, Valley Forge, Pennsylvania-based Vanguard Group Inc. and Baltimore-based T. Rowe Price Group Inc. are the three largest target-date providers by assets and account for a combined 76 percent of assets, Morningstar said.

Fidelity’s Share

Fidelity’s market share has fallen to 37 percent, or $125 billion in assets, from 48 percent, since 2007. During the same period, Vanguard has gained 6 percentage points to 23 percent market share or $80 billion in assets, according to the report. Vanguard’s target-date funds hold baskets of index funds and Boston-based Fidelity’s primarily hold actively managed funds.

Plan sponsors have moved toward indexing in part because some actively managed funds lost more than the market during the decline, Charlson said. The cost advantages of index funds have also driven the shift, he said.

Vanguard’s funds remained the least expensive in 2010 with average fees of 18 basis points, compared with the most expensive provider OppenheimerFunds Inc., based in New York, whose funds had average expenses of 1.68 percent. The average expense ratio for target-date funds in 2010 was 1.02 percent, according to Morningstar. A basis point is 0.01 percentage point.

More than three quarters of retirement plans administered by Vanguard offer a target-date fund and about one third of the firm’s 3.5 million participants had part or all of their savings in the investment, said spokeswoman Linda Wolohan.

Top Funds

The top-rated target-date providers by Morningstar based on performance, expenses and other factors were American Funds, a unit of Los Angeles-based Capital Group Cos., T. Rowe Price and Vanguard, the report said. Last year funds from Kansas City, Missouri-based American Century Investments also received a top rating. Funds from New York-based AllianceBernstein fell to the lowest ranking this year and OppenheimerFunds received the lowest ranking again, as well.

The U.S. Department of Labor and Securities and Exchange Commission proposed rules last year to help American workers better understand how target-date funds offered in 401(k) plans work. The Labor Department’s proposal in November would require disclosures about the asset allocation, how it will change over time with a graphic illustration and information about the significance of the “target date,” according to a statement.

Date Range

Target-date fund names usually include a date that represents the year around when the investor expects to retire. Under the SEC’s measure announced in June, the types of investments such as equity or fixed-income securities would have to appear with the fund’s title when first used in marketing materials, according to the agency.

About 72 percent of all target-date fund assets were held inside an employer-sponsored defined-contribution account at the end of 2010, according to the Investment Company Institute, a Washington-based trade group.

Retirement savings totaled $17.5 trillion at the end of 2010, or 37 percent of U.S. household financial assets, according to ICI. Assets in defined-contribution plans such as 401(k)s increased about 5 percent to $4.5 trillion in the fourth quarter of 2010, the ICI said.

To contact the reporters on this story: Margaret Collins in New York at mcollins45@bloomberg.net. Elizabeth Ody in New York 7569 or eody@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

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