Glide Paths Shine in 2018's Downturn

by Murray Coleman - Tuesday, 26 March, 2019

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

But that, in no way, tells the whole story. The 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 and over time a portfolio's exposure to riskier assets like stocks. Meanwhile, target-date investments are designed to gradually and predictably ease portfolios toward more conservative assets 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 permit participants a suitable investment strategy that meets them where they are on their particular 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."

We saw this--and perhaps even better--investor behavior in the latest, albeit more abbreviated, downturn 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."

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 TDF 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.

At Index Fund Advisors, we've been advising our individual clients for years on the use of glide paths. In 401(k), 403(b) and similar workplace savings plans, we prefer target-date funds from Dimensional Fund Advisors and Vanguard. If you would like to learn more about IFA's 401(k) services, please feel free to check out:

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