Why have some target date funds recently increased their equity allocation?

By admin

In October 10, 2014

On Investments, Financial Markets & Economy, Retirement/401k/Collective Funds

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Blackrock, Fidelity and Pacific Investment Management Co have increased their equity allocation within their target date funds in the past year. These shifts have consultants, advisors and analysts questioning not only the reasons behind the move, but the potential consequences, especially if the recent market correction would expand. A few excerpts:

“The shared characteristic these funds have is they have not been doing so well since 2008. The question is if the markets had gone down, would they have made these changes?”

–Janet Yang, fund analyst, Morningstar

“Our concern is that this is happening after a pretty good run in the equity market. If it’s a reaction to the fact that some target date funds haven’t been competitive then it is a concern.”

–Lori Lucas, defined contribution practice leader, Callan Associates

The Funds boosting their equity allocations have each cited differing reasons for the changes.

“Given that employees’ wages tend to be flat or go up in value slowly, like a bond, BlackRock wanted to make sure that the target date funds were designed to provide greater returns during the course of employees’ lifetimes.”

–Chip Castille, head of BlackRock’s U.S. retirement group

“Fidelity made its changes in January after it revamped its capital markets forecasts, which it revisits annually. None of our work was saying ‘hey the equity markets did well, we should be in equities.’ It was about if we have a dollar today, how do we want to put it to work based on what our capital markets assumptions are telling us.”

–Mathew Jensen, Fidelity’s director of target date strategies

“The decision was supported by our view that the global macro environment had become more stable post the financial crisis”

–John Miller, head of U.S. retirement at Pimco

The article, titled: Big U.S firms boost equity weightings in 401(k) target-date funds was written by Jessica Toonkel. It can be read on the Reuters website.

This piece reinforces a concern that some have voiced about Target Date Funds- that the various providers can have different strategies. Consequently, Plan Sponsors and participants need to dig under the hood to really understand the investment allocations and the management’s investment philosophy to be sure they choose the appropriate vehicle to match their goals and risk tolerance.