3/23/2011 1:12 PM ET|
How risky is your 401k?
If it's a target-date fund, that's a good question to ask. The 2008 crisis exploded the myth that these 'set and forget' investments are all equally safe.
Target-date funds sound simple and straightforward: An investor picks the fund closest to his or her desired retirement date and leaves the asset allocation and rebalancing decisions to experienced fund managers.
But because of the stinging losses these funds suffered in 2008's financial crisis -- the average target-date fund lost almost 34% -- investors and even the U.S. government have been questioning the transparency and marketing of these popular 401k products.
"It was kind of a perfect storm," says Eric Endress, an investment analyst at CBIZ Financial Solutions, a national financial services and consulting company. "All of these employers were taking (target-date funds) up, and they were really rapidly growing in the marketplace. Then 2008 happened before these products were really ironed out and marketed properly."
Scrutiny from regulators has increased as a result. A report in late January by the Government Accountability Office urged the Department of Labor to require 401k plan sponsors to assess more thoroughly the appropriateness of particular target-date funds for their employees. The GAO also suggested better education for investors on the strategy, composition and risks of these funds.
"A lot of people almost viewed (target-date funds) like they were guaranteed accounts," says Endress. "People were thinking, 'OK, if I'm in the 2010 account, I'll be guaranteed not to lose money between now and 2010,' when in fact that wasn't the case."
That gap between perception and reality, coupled with wide variations in fund composition and performance history, has muddied the target-date waters further, causing some investors to take on outsize risk for their retirement and financial goals.
"There was an assumption that an investor would have a very conservative portfolio at the target date," says Susan Viston, a portfolio specialist at ING Investment Management. "That wasn't always the case. It became clear that (different target-date funds) have very different philosophies and approaches that can lead to different allocations and wide performance dispersions."
Experts offer these suggestions on how you can avoid surprises in your target-date fund:
Know the glide path
The trademark feature of target-date funds is a built-in asset allocation model -- the so-called glide path -- designed to shift automatically from a more aggressive strategy to a more conservative tack as the investor's retirement target year approaches.
For example, while a fund with a target date that's 40 years in the future, such as T. Rowe Price Retirement 2050 (TRRMX), might have a stock allocation of almost 90%, funds with sooner target dates tend to back off from equities and allot more money to traditionally less volatile asset classes, such as bonds. The T. Rowe Price Retirement 2015 (TRRGX) fund has comparatively fewer assets in stocks -- about 65% -- and a heavier allocation to bonds, about 29%.
However, wide variations in glide paths among fund families have produced very different results, especially for investors closest to retirement. "Some of the target-date providers had allocations to equity between 50 and 65%, while others had as low as 30% or 20% (at the target date)," Viston says.
Not surprisingly, more conservative funds fared better in 2008's harsh bear market, while investors with more aggressive funds lost almost half their portfolio's value in some cases.
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Yet this article doesn't mention fees at all when asking how risky your 401k is! The fact that workers are gouged tremendously, and campaign-contributed Congress won't do anything about it, is the riskiest and worst part of it.
"It was kind of a perfect storm,"
Perhaps it wasn't. Perhaps it was harvesting, which seems to occur every time a lot of small people put a whole bunch of their assets into a big pile. Trillions in 401k's is a pretty big pile, and that is the risky part.
If you haven't noticed your 401k's are heading back to 2008 levels. Wall Street is in the process of raiding them to pay bonus's. They let them build up close to where they were and now it going backwards again. I see a manupilatipn pattern going on here?? I dumped mine at 12500. i remmmber 2008. You can always get back in if your wrong.
Duh, what am I missing? If people had just done the "set and forget" strategy, they'd be doing fine. The losers were those who bought at the top and sold at the bottom. Doesn't sound like "set and forget" to me.
I don't recall hearing of any funds whose stated strategy was "Buy now, wait for it to go down, and then sell. Then complain because you were stupid.".
Everyone had better put at least 10% into physical gold and silver....50% might be more prudent.
How much more proof do people need in the light of all the political, social and economic upheavals world-wide, eh???????
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