Automatic investment strategies aim to quell self-sabotagers, but some retirement savers could still have a problem
As coronavirus panic has investors across the world seeing red, their desire to pull out of stock markets has transformed from a mild itch to an urgent demand. For those invested in long-term strategies, it’s a dangerous feeling to give in to — and that’s exactly what target-date funds are trying to prevent.
“The coronavirus outbreak has sent share prices plunging, but the managers in charge of these funds are all-in on the long term,” said a recent report by the New York Times.
Speaking to the Times, Jake Gilliam, head portfolio strategist for Charles Schwab, recalled how investors questioned his target-date funds’ lack of risk-taking amid the heady highs in the 2006 U.S. stock market. Two years later, he said people asked why the funds carried so much risk; in 2018, expectations once again swung towards more aggressiveness as the S&P 500 went on a continuous rise.
“We have been here before,” Gilliam told the publication. “I’ve seen the full cycle twice now.”
Andrew Dierdorf, a portfolio manager who helps run target-date strategies at Fidelity, also emphasized the importance of keeping investors from becoming their own worst enemy.
“One of the things we’re always thinking about, in good times and challenging times, is getting the investor to stay invested so they can achieve their long-run objectives,” he said to the Times.
The fact that managers are intent on staying the course is generally all well and good — but they can fail to account for specific needs and situations. Case in point: a new study from Invesco has found that some participants in defined-contribution plans actively make investment decisions across the menu of target-date offerings.
“[C]ore menu design has remained relatively unchanged leaving behind a subset of participants who do not believe investing solely in a single TDF is right for them,” John Galateria, Invesco’s head of North America institutional, said in a statement.
That conclusion was based on a study covering 110 plan sponsors at organizations with at least 5,000 workers and minimum DC plan assets of US$250 million. It also drew on an online survey of over 2,000 DC plan participants aged 21 to 72, with personal incomes of at least US$30,000.
Referring to plan members who invest in more than one TDF as “forgotten participants,” Galateria said such members make financial decisions in their DC retirement plan with limited financial knowledge. That, coupled with widespread overconfidence among participants, could pose a “fiduciary concern for plan sponsors.
“The addition of risk-based strategies can help strengthen a plan sponsor’s fiduciary standing, and also provide a guard rail for participants who lack the time and knowledge to create a diversified portfolio from core menu options and rebalance regularly,” he said.