Target-date funds are the investment engines that power many Americans’ 401(k) plans, as they offer a cheap and easy way to make set-it-and-forget-it decisions about retirement. But last year’s steep losses in stocks and bonds showed they aren’t immune to poor performance—and highlighted a divide in the investing strategies that guide most of the funds.
There is no blanket approach among target-date funds, says Megan Pacholok, a senior analyst at Morningstar Research Services.
Some firms, including industry titan Vanguard Group, stick with strategic asset allocation, which involves setting target allocations across various asset classes and rebalancing regularly to stay close to the allocations through all market conditions. Others, such as T. Rowe Price Group, allow tactical changes to portfolios to respond to short-term changes in market conditions.
Target-date funds are dull by design, gradually adjusting the allocation of stocks and bonds to become more conservative as the fund approaches its target date, typically the approximate year you expect to retire. Assets have ballooned in recent years, but with no place to hide from the stock and bond losses last year, total assets in target-date funds fell to $2.82 trillion in 2022 from a record $3.27 in 2021, according to a recent report from Morningstar.
| Fund / Ticker | Fund Assets | 1-Yr Return | 3-Yr Return | 5-Yr Return | 10-Yr Return |
|---|---|---|---|---|---|
| Vanguard Target Retirement 2030 / VTHRX | $81.8 billion | 1.7% | 4.8% | 5.1% | 6.9% |
| Vanguard Target Retirement 2025 / VTTVX | 74.7 | 1.3 | 3.9 | 4.7 | 6.4 |
| T. Rowe Price Retirement 2030 / TRRCX | 16.5 | 1.5 | 5.7 | 5.6 | 7.6 |
| T. Rowe Price Retirement 2025 / TRRHX | 11.9 | 1.0 | 5.0 | 5.2 | 7.1 |
| T. Rowe Price Retirement 2030 / TRPCX | 11.0 | 1.7 | 5.9 | 5.8 | N/A |
| T. Rowe Price Retirement 2025 / TRPHX | 7.8 | 1.1 | 5.2 | 5.4 | N/A |
| T. Rowe Price Target 2030 / TRRWX | $539 million | 0.8 | 4.7 | 5.0 | N/A |
| T. Rowe Price Target 2025 / TRRVX | 483 | 0.3 | 4.2 | 4.7 | N/A |
| T. Rowe Price Retirement Blend 2030 / TBLGX | 115 | 2.1 | N/A | N/A | N/A |
| T. Rowe Price Retirement Blend 2025 / TBLEX | 107 | 1.4 | N/A | N/A | N/A |
| S&P 500 | 5.8 | 11.9 | 11.1 | 12.4 | |
| Target-Date 2025 Category | 0.2 | 3.4 | 4.1 | 5.7 | |
| Target-Date 2030 Category | 0.7 | 4.5 | 4.7 | 6.4 |
Note: Data through June 5. Three-, five-, and 10-year returns are annualized; N/A=not applicable
Sources: Morningstar; Bloomberg
The Vanguard Target Retirement funds amassed the most net inflows in 2022, taking in more than $64 billion. The world’s second-largest asset manager, with $7.7 trillion in assets under management, is firmly in the strategic asset allocation camp. Last year it published a note saying the “evidence is clear” when it comes to strategic asset allocation.
Brian Wimmer, head of multi-asset solutions at Vanguard, says the strategic asset-allocation committee is focused on setting up investors for success over many decades. Tactical asset allocation, he says, is akin to market timing.
“There’s a very high bar to make changes,” he says—so high that Vanguard has made only a handful of strategic allocation changes since launching the Target Retirement series in 2003. The most recent was in 2015, when Vanguard boosted international allocations in stocks and bonds.
“Changes tend to be infrequent and long-term oriented,” Wimmer says. “They’re intended to take advantage of long-term returns that the equity and fixed-income markets will provide us and are not intended to exploit a short-term perceived market movement or inefficiency as, based on our experience and research, that’s very, very difficult to do.”
Vanguard’s target-date funds, in other words, are largely set in stone.
Not so at rival money manager T. Rowe Price. The firm uses a strategic asset allocation as the baseline for its portfolios, but teams can make tactical adjustments to reflect their short-term views.
“[Tactical allocation] is a lever that allows you to have someone with a hand on the steering wheel who has the ability to incorporate more near-term views into the portfolio as markets evolve,” says Andrew Jacobs van Merlen, portfolio co-manager for target-date strategies in T. Rowe’s multi-asset division.
“A manager who is purely strategic is playing the long game, and the long game results in 90% of the outcome,” he adds. “But you can do better than that by taking advantage of market dislocations.”
Last year was one of best years from a tactical-allocation perspective, he says: “In 2022, bonds didn’t work and stocks didn’t work. We went into cash and floating-rate loans because we didn’t like the risk on the equity side or the risk on the defensive side of the portfolio in bonds.”
Market volatility is a good reminder to look closely at how your fund manages your retirement money. Don’t expect your target-date fund to be nimble and make changes in response to market conditions.
Write to Lauren Foster at lauren.foster@barrons.com
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