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By Christine Benz | 10-18-2012 02:00 PM

Are Retirement-Fund Critics Off-Target?

Vanguard's John Ameriks emphasizes that target-date funds are an investment, not a guarantee, and also goes in depth on the role of equities near retirement as well as the 'to versus through' debate.

Christine Benz: Hi. I'm Christine Benz for Morningstar.com. Target retirement mutual funds have faced criticism on a number of different fronts over the past several years. I recently sat down with John Ameriks, who is head of investment counseling and research at Vanguard to discuss some of these issues.

John, thank you so much for being here.

John Ameriks: Always a pleasure, Christine. Good to see you.

Benz: John, you spend a lot of work on retirement planning, and specifically one thing that you've looked at is target-date plan glide paths. In the wake of the bear market many target-date funds come under assault. A lot of people said these really didn't do what they were supposed to do. A lot of people getting close to retirement saw big losses in their target-date portfolios. Let's talk about the category in the wake of what was a very trying market environment.

Ameriks: Yes. Part of me says, "Well, why would we want to go back and rehash things?" But the other part of me says, "Look, I think there were some things that we learned coming out of the market crisis, and also some things that we've learned subsequent to the market crisis about target retirement funds that are revealing, and I think maybe provide a little bit more support for my argument, which would be that target-date funds have in fact, throughout this cycle, done what we had hope they would do."

So, the first set of issues was just the losses in the portfolios that occurred at the end of 2008 and into 2009, and there was an awful lot of attention that was paid to that. All of it I think came with a premise that somehow these funds shouldn't have lost money or that there had been an implicit promise in the funds that they wouldn't lose money.

And I hope and I think we tried as best as we can at the time and we continue to try today to make sure that everyone understands that target-date funds are an investment. There is exposure to the market. So, I'll make a point that I made at the hearings that took place. They were the first-ever joint regulatory hearings that took place in 2008 around target-date fund performance. I made sure to say, "Look, the idea of a target-date fund isn't to get rid of market risk. It's to try to help people to put a portfolio together in a way that involves a sensible exposure to that risk over their lifetimes." So, a lot of work has been done subsequently just to make sure that nobody is confused and thinks that there is potentially some kind of a guarantee here. There isn't.

I've always said the one sort of reality check on that is while it makes for a splashy headline--people didn't get what they wanted out of target-date funds--we know the other anecdote that went around in 2008 were that there were a lot of individual plan participants that said, "I don't even want to open my statements in 2008." A lot of target-date fund shareholders may have said that, as well. And if you think about that--and I definitely understood that sentiment, a lot of our investors do--what it reveals is, they know there is a risk there, and they know that what they were going to see was not going to be something that they particularly would want to see at the time. And they knew enough, not to pay too much attention to it.

I think subsequently what has happened--and I want to be very humble about this because it did not have to happen in this way--but history would have led you to believe that what subsequently happened isn't unusual. The markets came back, and they came back very strongly. Steve Utkus [director of the Vanguard Center for Retirement Research] and I have done a lot of work as you know trying to look at how well people have done in their 401(k) plans through the financial crisis. The results there are encouraging. People in target-date funds did experience modest positive returns, single-digit positive annualized returns over the five-year period ended at the end of last year. And if you think about that and think about the market environment we lived through, it's really hard to say there could have been a worse test or a more rigorous test for the target-date fund as a concept and also--I suppose we could all expect better results; it would be great if we had twice that level of return--but it's certainly a decent level of return in that environment. And so I'd say we've really passed the test there.

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