Skip to Content
Fund Spy

Have Target-Date Funds Improved Their 'D'?

Recent market turbulence provides a test of these funds' resiliency.

Mentioned: , , ,

Target-date fund providers have gotten the message. One of the chief complaints about target-date funds since the 2008 market collapse was that 2010 category funds--those aimed at that time for investors planning to retire within a couple of years--had not adequately protected nest eggs. Many portfolios, often loaded with stocks or high-yielding, lower-rated bonds, surprised investors with significant losses prompting politicians and federal regulators to hold hearings and issue reports. While the government hasn't decided to mandate risk levels as a result, many mutual fund firms have made changes on their own anyway.

This year's correction is the first opportunity to test whether those revamped strategies have made a difference. Although the swoon has lasted only a few months and may not yet be over, the drop has been steep enough and long enough to warrant doing a gut check on this group.

Formulating the Comparison
In choosing time periods to compare, I took the peak-to-trough period of the S&P 500 during the recession (Oct. 9, 2007, to March 9, 2009) and the S&P's peak-to-trough so far for 2011 (April 29 to Aug. 8). And to measure how resilient the funds were, I opted for a simpler, homespun version of downcapture ratio. For each target-date fund or category, we divided its return for the period in question by that of the S&P 500, arriving at what we can call a "loss ratio" versus the S&P 500.

Josh Charlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.