The set-it-and-forget options in your retirement plan may become more interesting and less expensive in 2017.
Target-date funds are pre-mixed portfolios that automatically invest more conservatively over time. Here's how they work: Investors select funds near their estimated date for retirement, say 2050. That 2050 fund typically starts out with 90 percent invested in stocks and gradually shifts to a portfolio with roughly 40 percent allocated to stocks and 60 percent to fixed income more than three decades later.
These funds are popular because they are usually the default investment option for retirement plans that automatically enroll participants. For example, Vanguard estimates that 69 percent of its retirement-plan participants invest in target-date funds.
Several fund sponsors have modified that basic target-date formula in hopes of attracting more investors and improving returns:
- BlackRock, the world's largest asset manager, launched a "smart-beta" target-date fund this year that aims to reduce volatility and boost returns by using ETFs that screen stocks based on a combination of size, value, quality and momentum. "It's a recognition that we expect a lower-return environment," said Nick Nefouse, co-head of BlackRock's LifePath target-date fund series.
- Dimensional Fund Advisors started a target-date fund series in November 2015 that seeks to cut market volatility by tilting heavily to inflation-protected securities years before investors reach retirement. At retirement, investors would have more than 60 percent of their portfolio in Treasury inflation-protected securities in a DFA target-date fund.
- Natixis Global Asset Management has filed documents with the Security and Exchange Commission to create the first series of target-date funds that select investments based on companies' labor practices, human rights records and environmental impact.
The new target-date funds face an uphill battle to gain market share, said Jeff Holt, an analyst for mutual fund research firm Morningstar. Three asset managers dominate the market for target-date funds — Vanguard, Fidelity and T. Rowe Price. (See chart below.)