Target-date fund managers dont outright admit it, but
they have reined in their risk-taking since the market crash of
2008, when they were barraged by furious customers, regulators,
and Congress members who claimed that the labeling of 2010
funds, and maybe others, was misleading.
They may not be admitting it, but they are paying much more
attention to volatility, inflation, diversification, and
ensuring income after retirement.
Managers claim they havent actually caved in to
pressure to change fund glide paths, the
slow shift in the ratio of equities to fixed income from the
date the first dollar is invested, through the decades after
the planned retirement date. Fidelity Investments path,
for instance, still calls for about 50 percent equities at
retirement, 40 percent five years later, and 20 percent fifteen
But thats only part of the story. What has changed is
the makeup of the securities that comprise the equity and bond
allocations. And that change is affecting the glide paths.
The most widespread innovation is more use of inflation
hedges, including TIPS (Treasury inflation-protected
securities), REITs (real estate investment trusts), securities
tied to natural resources and other commodities, and perhaps
high-yield bonds. Fund managers and consultants say this now
typically constitutes around 5 percent to as much as 20 percent
of the total portfolio, although that can depend on the target
In a similar move aimed at getting some post-retirement
stability, Principal Financial Group in November 2009 created a
special income-oriented fund with a heavy component of emerging
markets debt, global REITs, global equities with a
dividend focus, preferred securities, and master limited
partnerships in oil and gas pipelines, according to Randy
Welch, the firms director of investment services. The
firm starts moving assets into this pool around seven to ten
years before the targeted retirement year, gradually increasing
the share to 6 to 8 percent of the portfolio a few years after
The other major change is a bigger allocation to
international equities. Vanguard Group, for instance, in
September upped its allocation to 30 percent of total equity
holdings from 20 percent, at the same time that it merged the
three international portfolios it had been using. Experts say
that many other managers are similarly increasing their
percentage, or even going up to 40 percent.
The impact on the glide path is twofold.
First, the money for these new investments has to come from
somewhere. To the degree that its from the same overall
asset class from U.S. equities to international equities
or from bonds to TIPS the glide paths
stock-to-fixed income ratio doesnt change. But what about
REITs and commodities? They can act more like equities,
so the money can come from equities, says Mark Kastory,
an analyst at Hewitt EnnisKnupp (the investment consulting arm
of Aon Hewitt). However, they arent equities.
Even more dramatically, David OMeara, an investment
consultant at Towers Watson, says that high-yield bonds,
emerging markets debt, and commodities are often an
explicit replacement of some of the equity component,
definitely de-emphasizing equities to some degree.
Theres no way that a high-yield bond or emerging markets
debt can be defined as equity.
The second impact comes from the overall motivation behind
all these changes -- to provide a more stabilizing force and
lessen volatility. That should reduce risk and thus, perhaps,
outrage after the next market slide.
Since the financial crisis, certainly theres
been an even greater focus on trying to reduce the impact of
extreme economic environments, OMeara says.
Fran Hawthorne is the author of the award-winning
Pension Dumping: The Reasons, the Wreckage, the Stakes
for Wall Street (Bloomberg Press) and Inside the
FDA: The Business and Politics behind the Drugs We Take and the
Food We Eat (John Wiley & Sons). She writes regularly
about finance, health care, and business ethics.