Target date funds stumbled in 2015, after posting six years of positive returns following the financial and economic crisis.
Target date funds had losses of -0.86% for the year - still much better than the "carnage" of 2008, according to Lori Lucas, head of the defined contribution practice at Callan Associates, a San Francisco-based investment consultant.
"In 2008, the median target date fund lost 26.41%," Lucas said. "After that, target date fund managers generally decreased their glidepath allocations to equities and improved their overall diversification." She noted that the 2015 downturn came as several large target date fund managers have reported increasing their glidepath allocation to equities over the last several years.
Equities performed well in the fourth quarter of 2015: the S&P 500 gained 7.04%, according to Callan, boosting its Target Date Index by 3.01% in the quarter and narrowing the annual loss to a modest amount.
The range of target date fund performance also narrowed considerably when compared to 2008. That year the gap between the best- and worst-performing target date funds (those in the 10th percentile versus those in the 90th percentile) was more than 22 percentage points. In 2015, the performance difference between the funds in the 10th and 90th percentiles was less than two percentage points: -07% to -1.78%.
Still, advisors and their clients have benefitted recently by choosing well-performing target date funds. Callan puts the five-year performance of the 10th percentile target date funds at 7.53%, versus 4.42% for the 90th percentile funds, through 2015.
Donald Jay Korn is a New York-based financial writer who contributes to Financial Planning and On Wall Street.
