Economic stimulus cheques: the pandemic’s effect on jobs has heightened awareness of retirement benefits © Jeff Fusco/Getty

The vicissitudes of 2020 have underscored the importance of having a nest egg, including for retirement. They have also created significant headaches for active investors. Little wonder, then, that when it comes to retirement planning in the US, most investors rely on plans that remove any need to second-guess the market. 

Many retirement advisers say target-date funds (TDFs) — where portfolios rebalance automatically according to the investor’s age and target retirement date — remain a safe bet. They make money for employees’ retirement accounts while allowing them to “set it and forget it”.

Nearly 60 per cent of all ongoing 401(k) pension scheme defined contributions are directed to TDFs, according to research firm Cerulli Associates, making them “by far the most common default investment” in defined contribution plans. 

The statistics are consistent with the experiences of clients of the FT 401 advisers, a list of top professionals advising US employers on defined contribution plans. They report that in 2019 about 39 per cent of defined contribution plan assets were directed to TDFs, versus 32 per cent for long-term mutual funds. 

“TDF participants are expected to be hands-off investors, letting the TDF do all the work,” says Ashley Dimayorca, vice-president of product management at PGIM Investments, the asset management arm of Prudential Financial. “TDF investors have historically outperformed non-TDF investors.” 

On average, Ms Dimayorca says, TDF investors gain 2.3 per cent more a year, which can lead to 50 per cent more additional retirement wealth because of the compounding effect, she says, citing research from PGIM.

Early in 2020, amid the market sell-off triggered by coronavirus, long-term strategies for TDFs remained intact, according to Morningstar, the investment research company. Despite “turbulence” in the first quarter of the year, Morningstar said in May that “most target-date funds performed in line with expectations”.

Molly Beer, area vice-president at insurance broker Gallagher, says TDFs have maintained their popularity during the Covid-19 pandemic. “We do see their popularity is reinforced during times of market volatility,” she says. 

At the same time, Jania Stout, managing director and co-founder of Fiduciary Plan Advisors, says TDFs “help those who don’t have the time or desire to do it themselves”. Most plan participants — company employees — tell her they have not looked at their investments “since joining the plan — in some cases, this could be 10 to 15 years.” 

Kathleen Kelly, founding and managing partner of Compass Financial Partners in Greensboro, North Carolina, says the biggest benefits of TDFs for investors are the relatively low cost and the way the asset allocation “evolves as the participant ages, becoming more conservative as employees approach retirement age”.

If there is a downside, says Ms Kelly, it is that they are focused on the age of participants, whereas there are other variables such as income that could affect the best allocation of assets.

Indeed, Kelly Famiglietta, partner at Charles Stephen in Albuquerque, agrees that TDFs are not ideal for every investor. They are designed for the average employee but “there is no such thing as an average employee,” she says.

The lack of customisation to the plans has driven some innovation, say advisers, but it has been “modest”. 

“We like seeing how fund companies have attempted to differentiate themselves to match different participant demographics,” says Janel Cross, managing partner with Align Wealth Strategies in Lancaster, Pennsylvania. The “key differentiators” are the asset allocation strategy and offering a hybrid of passive and active investments, as well as the slope of the “glide path” — the calculation of how assets should be spread between different investment types according to an individual’s retirement age. 

As for future developments, TDFs will feel some effects from the coronavirus pandemic, the advisers say. Ms Stout points to the Coronavirus Aid, Relief and Economic Security (Cares) act, which tops up unemployment benefits for a period of time, and which she says will lead to greater discussion of lifetime income. She says some asset managers are building TDFs tailored to an individual’s income objectives — an “exciting” development, she says.

Ms Stout also points to fund manager BlackRock’s launch of a TDF that integrates environmental, social and governance, or ESG, metrics. “Now we wait for a five-year track record to see how it does,” she says. 

Even so, advisers say innovation in TDFs is likely to remain limited, as anything bolder would defeat the aim of simplicity. 

“I worry about this adding additional layers of complexity to something that we are trying to purposely keep very simple,” says Ms Famiglietta. 

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