Anything You Can Do I Can Do Better


Marketwatch notes some kinks in our concepts of retirement security:

The vast gulf in performance underscores a little-appreciated fact of target-date funds: They may focus on the same retirement year, but investment philosophy and the percentage of stocks, bonds and cash varies widely.
“All retirement funds are not equal,” said John Markese, president of the American Association of Individual Investors. “I was shocked to find the differences in how they move money over time, what the original starting balances were, and the discretion some of them have to change those percentages depending on market conditions.”
Longevity risk
Target-date retirement funds have been billed as “set-it and forget-it” investments. These one-stop shops blend a fund company’s stock and bond offerings into a single all-purpose portfolio. Allocation to stocks and bonds is automatically rebalanced over time, and the fund is supposed to ratchet down risk gradually as retirement nears.
Target-date funds have proved enormously popular with retirement savers, and the U.S. Department of Labor has even green-lighted them as “qualified default investment alternatives” for 401(k) plans.
Yet a crucial shift in the design of some of these funds has profoundly impacted investors’ fortunes in the bear market.
A couple of years ago, leading providers boosted the equity portion of these portfolios and decided to hold this stock-heavy line well into people’s retirement years.
The strategy is rooted in the belief that retirees should have substantial amounts of money in stocks to get through old age and not outlive their money. The average 2010 target-date fund had about 48% of assets in stocks at the end of September, according to consulting group Financial Research Corp.
Fidelity Investments, for example, used to merge its target-date funds into th
FFFAX 9.46, +0.02, +0.2%) , with just 20% in stocks, between five and 10 years after the retirement date. In 2006 this so-called roll-down period, or glide path, was extended another five years, which keeps retirees more heavily exposed to stocks for longer.
“I view the implicit time horizon of a 2010 fund as being 22-plus years,” said Jonathan Shelon, a co-manager of Fidelity’s Freedom Funds lineup, which reflects an 85-year life expectancy for a typical shareholder. “The goal is to produce a stream of income, post target-date, which helps people maintain income for life.”
Fidelity isn’t the only leading fund company to have reworked its target-date funds. Vanguard Group increased stock allocations, also in 2006, while T. Rowe Price Growth
TROW 31.43, -0.36, -1.1%) has always channeled more to stocks in its retirement-oriented funds than its peers.
“We think in terms of long time periods,” said Jerome Clark, manager of T. Rowe Price’s retirement funds. “The vast majority in our modeling of the outcomes are going to be better served by a higher equity, growth-oriented approach.”
But this answer to so-called longevity risk has been costly in the bear market. The alterations that were made during a more bullish time have added to target-date funds’ troubles as the market melted down. Read related story on changes to target-date investments.

Glad I have Social Security.