Even During Volatility, Target Date Investors Stay on Target

Mary Brunson, AIF, Vice President and Co-Creator of Investing for Catholics
Monday, March 4, 2019

In 2018, investors turned fickle. By the time the dust was settled, the S&P 500 had tumbled more than 4% for the year.

But that, in no way, tells the whole story. The benchmark index took its roughest beating in the final quarter of the year, giving up a whopping 13.5% in just three short months. The blue-chip benchmark delivered its first negative year since the Great Recession, and the worst one-month performance since 1931.

Indeed, it was one of those rare stock market performances that can render uneasy even the most stoic of investors.

An oasis in this desert of sagging investment returns was America's workplace retirement plans.

A recent analysis by Fidelity of 22,600 corporate defined-contribution plans, with more than 16 million investors taking part, showed that 98% of those participants didn't flinch in 2018. Instead, they kept dutifully contributing to their 401(k) and 403(b) accounts.

In fact, in 2018’s tough fourth quarter, market analysts actually saw a slight uptick in contribution rates.

As pointed out by Plansponsor magazine, much of the credit is owed to the overwhelming presence of target-date offerings in defined contribution plans.

These holistic, one-step investment solutions automatically adjust downward a portfolio’s exposure to riskier assets like stocks. They are designed to gradually and predictably ease portfolios towards more conservative investments like bonds.

Such managed strategies follow a “glide path”, enabling investors to take their hands off of the controls, leaving the portfolio management to the experts.

Industry estimates show that a vast majority of plan sponsors these days offer target date investment offerings, most frequently as the default investment alternative. Broad studies of retirement investment trends also strongly suggest this is proving to be a good step forward for participants and plan sponsors alike -- and a far more desirable default than a balanced fund that may be too risky for older employees and too conservative for younger ones.

More assuredly, target date strategies serving as the default investment provide participants a suitable investment strategy aligned with their specific path to retirement. 

A number of studies also show that assets in target date strategies tend to be "stickier" in terms of reducing excessive trading in the retirement portfolio, and create a more disciplined investment environment for rank-and-file retirement plan participants.

A Barron’s article titled “Target Date Funds Take Over” noted the better investor behavior that travels in lock-step with target date strategies. It observes that “holders were four times less likely to trade out of their target-date investments during the market plunge of 2008 than holders of other 401(k) investments.”

Indeed, we saw this--and perhaps even better--investor behavior in the latest, albeit more abbreviated, rout of 2018.

Ease of use and better investor behavior go a long way in explaining why target date strategies have become so prevalent in defined contribution plans. Today, more than half of 401(k) plan participants are 100% invested in target date strategies, with heavy inflows into the managed strategies topping more than $1 trillion in 2018--garnering kudos from industry heavy hitters.

The head of Morningstar's manager research group, Russel Kinnel, gives target dates ample props for providing an investment vehicle with a disciplined asset-allocation approach. In reviewing his firm's most recent "Mind the Gap" study, he discovers a pattern of target dates "often" producing "positive" behavior over extended periods.

“We think that the tremendous diversification of target date funds, combined with the steady investment of 401(k) plans, shows the fund industry at its best,” Kinnel says. “This is where well-designed investments meet a well-designed structure to help investors save and grow their retirement nest eggs.”


Target Dates with Passive Funds—A Winning Combination

Of particular interest is the rise of passive investments into the managed target date strategies marketplace. Along those lines, Morningstar's 2018 Target-Date Fund Landscape report finds that passive funds now dominate the target date industry. "The asset growth is remarkable: Industry assets amounted to only $158 billion at the end of 2008," note the firm's analysts.

The most "remarkable" trend for target dates is that plan participants' have "dramatically" increased their "preference for series that own passively managed funds," according to the Morningstar Landscape report.

The Chicago-based independent investment research firm figures that almost 95% of net flows to target-date strategies in that latest quantified 12-month period went to target-date series that invested primarily in index funds. This continued a trend that started in 2015, according to Morningstar, when net flows of target dates exceeded those for active competitors.


IFC = Target Date Portfolios Catholic Values

Sine 2014, Investing for Catholics (IFC) has been building and managing low-cost, diversified and passively managed target date strategies that are screened for Catholic values.

Through February, some 14,700 diocesan plan participants throughout the U.S. were invested in our managed portfolio solutions.

Each of our 10 IFC Target-Date Portfolios delivers a consistently age-appropriate exposure to the global stock and bond markets. Our portfolios target retirement dates in five-year increments, ranging from years 2015- 2060. The ultimate fund landing point arrives (within approximately five years of retirement) at a static mix of 40% stock funds and 60% bond funds.

IFC’s glide path, shown below, is similar to those of industry standards such as Vanguard, Fidelity and T. Rowe Price.

The investment fund expenses for the Catholic values-screened IFC Target Date Portfolios are among the lowest in the target date industry, ranging from 0.28%-0.31%. Diversification of the IFC portfolios is achieved through broad exposure to U.S., international developed and emerging markets for stocks as well as a global bond fund.

Allocation to a global real estate fund (REIT) rounds out the low-cost, diversified portfolio offering which includes more than 11,000 companies—all designed to maximize expected returns at a prescribed level of risk.

The proof, however, is in the pudding. The chart below shows that during a 17-year period studied -- using data provided by Pimco and Morningstar -- IFC's Catholic Values target-date series had, on average, generated greater returns and higher income replacement rates compared to target-date funds from Vanguard, T. Rowe Price, Fidelity Freedom, J.P. Morgan and American Funds.

IFC's Catholic Values target-date portfolios benefit from enhanced fund design and a socially responsible screening process architected by Dimensional Fund Advisors, a leading provider of passively managed mutual funds. DFA has made its mark by structuring funds that target the sources of higher expected returns when compared to other index-styled funds.

Entering February 2019, total assets in the component funds for the IFC Target Date Index Portfolios exceeded $11 billion.

An important reason why IFC's faith-based target date portfolios prefer DFA's strategies is that stocks and bonds aren't just selected based on corporate management's social consciousness in running their businesses. The funds are screened to closely align with the investment guidelines outlined by the United States Conference of Catholic Bishops.

Goods and services produced by companies are screened for criteria that includes, among others: abortion, contraceptives and contraception, gambling, stem cell research, human labor and child labor, weapons of war and landmines.

To learn more about Investing for Catholics’ retirement plan services and target date investment strategies, call 888-815-5025, visit investingforcatholics.com, or email mary@ifa.com.