Managed Accounts 4th Quarter Performance Overwhelms Target Date Funds' Performance
November 1, 2008
Recent market turbulence has cost investors trillions, but perhaps none are paying more dearly than retirement plan participants invested in the highly popular Target Date 2010 funds. Designed for participants nearest to retirement, 2010 funds are the most conservative of the target date profiles, yet they have lost investors an average of over 24% of their account values in the last 12 months. In general, target date funds have become wildly popular, but plan participant exposure has been magnified by the post-Pension Protection Act shift of assets to approved Qualified Default Investment Alternatives (QDIAs). Target Date funds have been the most widely used QDIA, therefore poor performance, especially in the most conservative profiles, is potentially disastrous for many participants, who have little time left to recover lost value.
In their search for a solution, many plan sponsors are now looking to Managed Accounts, another of the PPA-approved QDIAs. Managed assets at firms like PMFM, Inc., advisor to 401k Toolbox, have fared far better than target date funds. PMFM's most conservative portfolio, which matches up to 2010 target date funds in terms of investor profile, have experienced less than one fifth the average target date losses. The reason: PMFM's risk-based portfolios are able to take significant defensive postures--including large cash and cash equivalent positions--to to protect participant assets.
PMFM professionally managed accounts for 401(k) plan participants are proving far superior to target date funds as they side-step the performance difficulties of target date funds, producing dramatically better performance in these turbulent times. Further, by not digging deep holes of negative performance, they are positioned to benefit quickly from an upturn in the market. By contrast, target date funds that have lost 24% will require a gain of nearly 33% to break even. This is likely to become a center front issue for 2010 target date funds as participants move closer to retirement with their account values severely depleted.
There are a number of even more complex investor issues related to target date funds:
- All target dates are not created equal. Participant equity exposure varies dramatically, which may lead to fiduciary problems for the plan sponsor.
- It is unlikely that plan participants will use the target date funds correctly. A Fidelity study showed that 51% of participants holding a lifecycle/lifestyle target date fund owned other funds also, despite education that showed participants that such funds were a complete portfolio investment.
- Additionally, it is unlikely that plan participants who will retire around to 2010 can tolerate (or recover from) such larger losses this near their retirement. Their fear of having all eggs in one basket may cause them to bail out of their assigned target date fund ,forcing them to make an untimely and potentially bad decision about what to do with their assets.
PMFM managed accounts, however, offer significant investor and plan participant benefits:
- A managed account can be actively managed by professionals diligently working to protect assets on the downside and grow assets when the market is rising.
- A managed account provider is usually independent from the 401(k) plan vendor or fund companies who are providing the investments in the plan.
- Managed account providers offer an additional layer of fiduciary protection for the plan sponsor.
As an example of the performance difference now surfacing between managed accounts and target date funds, look at 401k Toolbox's Capital Preservation 70+ (a managed account strategy) compared to Fidelity Freedom 2010 target date fund and T Rowe Price 2010 fund.
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YTD
10/31/08
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Since Peak
(10/9/07-10/31/08)
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Toolbox Capital Preservation 70+
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-4.29%
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-5.71%
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Fidelity Freedom Fund 2010
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-23.72%
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-25.33%
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T Rowe Price 2010
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-25.75%
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-27.88%
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PMFM offers separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) managed account and investment advisory services in the nation. As of 12/31/07, PMFM manages more than $1 billion. The management team at PMFM includes experienced investment advisors with offices in Watkinsville, Georgia. PMFM offers 401k Toolbox, it's investment advice and managed account service, via vendor partnerships with 401k providers and direct to large plan sponsors. You can reach Senior Vice President, Tim McCabe, at 800-222-7636 or tim.mccabe@401ktoolbox.com.
Trends from Ink & Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com>, 508-479-1033