Big U.S. firms boost equity weightings in 401(k) target-date funds

Fri Oct 10, 2014 4:11am EDT
 
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By Jessica Toonkel

(Reuters) - In changes that have raised the potential investment risks in many 401(k) retirement accounts, several major fund companies are increasing the stock allocation of their target date funds, which are used by many of those with such plans.

BlackRock Inc, Fidelity Investments and Pacific Investment Management Co - all firms that have seen returns in their target date funds lagging competitors - have made adjustments in the past year so that 401(k) plan participants, particularly those who are younger to middle age, are more invested in equities. In some cases employees who are in their 40s now find themselves in funds that are 94 percent allocated into stocks, up more than 10 percentage points.

The changes have prompted concerns from consultants and analysts who worry that the fund managers are raising the risks too high for 401(k) investors as they seek higher returns, perhaps as a way to boost their own profiles against rivals.

This anxiety could grow if the recent decline in the U.S. stock market – the S&P 500 is down 4.5 percent since reaching an all-time high in mid-September and dropped more than 2 percent on Thursday – gains momentum. On the other hand, the increased bets on equities can be seen as a vote of confidence in the bull market, and are also a reflection of expectations of low returns from bonds in the next few years if interest rates climb.

"The shared characteristic these funds have is they have not been doing so well since 2008,” said Janet Yang, a fund analyst at Morningstar. “The question is if the markets had gone down, would they have made these changes?"

For their part, executives at these firms say the changes are based on optimistic long-term forecasts for equities, lowered expectations for bond market returns and a better understanding of how much investors, particularly younger ones, rely on these funds as their primary retirement savings vehicle.

Target date funds contain a mix of assets, such as stocks and bonds and real estate, and automatically adjust that mix to be less risky as the target maturity date of the fund approaches. The idea is that retirement savers can choose a target date fund that lines up with their own expected retirement year and then not have to worry about managing their money.

These funds have increasing significance for retirement savers, because employers can and do automatically invest workers' savings in target date funds, though the workers can opt out. Some 41 percent of plan participants invest in these funds, up from 20 percent five years ago, according to the SPARK Institute, a Washington DC-based lobbyist for the retirement plan industry.   Continued...

 
People walk by the New York Stock Exchange in New York's financial district March 11, 2014.  REUTERS/Brendan McDermid