Target-date series assets, as well as the number of target-date series, have doubled in recent years.

As of November 2011, there were 43 unique open-end, target-date series, and approximately half of these series began operations in the last five years, with five new series introduced in 2009 and 2010 alone. In 2008, target date series held $175.8 billion in assets, which more than doubled to $368.5 billion by October 31, 2011.

Seeming to contradict this rapid growth, target-date funds near retirement experienced severe losses in conjunction with the stock market in 2008. Target-date 2010 funds, a mere two years from their retirement date at the time of the economic downturn, experienced dramatic median performance losses near 30% but showed positive median returns in the years 2009 and 2010. By the end of 2010, target-date funds for 2010 had median annualized ten-year performance of less than 5%, which is similar to returns an investor would have experienced in a traditional fixed income mutual fund investment. Fixed income funds had annualized median returns of 3.97% for the ten-year period ending December 31, 2010.

These significant losses helped prompt the Securities and Exchange Commission to propose new nomenclature rules for target-date funds along with guidelines regarding disclosure of so-called "glidepath" information. The SEC recognizes that these rule changes are a result of the losses in 2008 and the increasing significance of target-date funds in 401(k) plans. Under this new proposal, funds would be required to provide detailed disclosure of their asset allocation at the fund's target date, including a table, chart, or graphic representation of the glidepath. Another aspect of the change would require equity exposure percentages at the retirement date to be included as part of the fund name. Investment in equity funds versus fixed income funds results in different performance returns and different expenses, which is why it is important for investors to understand the percentage of equity held by the target-date fund.

Compared to 2008, fund companies have increased disclosure in the prospectuses of target-date funds. One obvious change revolves around the "to" versus "through" dichotomy. In 2008, it was difficult to discern which target-date series had a "to" or a "through" structure. In 2011, each target-date series prospectus contains this information. However, most target-date series' prospectuses do not specifically identify themselves as "to" or "through," but instead provide this information with graphical representations of their glidepath. Whether a target-date series is "to" or "through" is important because they have different levels of average equity exposure.

Before we explore how equity exposure varies for "to" and "through" equity funds, we must first define these terms. Specifically, "through" target-date funds continue to adjust their equity exposure after the retirement date, while "to" target-date funds either do not adjust their equity exposure after the retirement date or immediately move the assets into their retirement income offering. Examples of a glidepath for a "through" and a "to" fund are featured in Figures 1 and 2. These examples come from actual target-date series.

Based on our definitions, approximately 65% of target-date funds have a "through" structure (Figure 3). Because of the way "through" target-date series are designed, we would expect them to have more equity exposure than "to" target-date funds because the expectation with "through" target-date series is that an investor will stay in them longer. The data supports this expectation. "Through" target-date series have an average of 45% equity exposure at the retirement date, compared to an average of only 31% equity exposure for "to" target-date series. The mode (the equity exposure of the greatest number of funds) for "through" target-date series varies from that of "to" target-date series.

The difference in the average equity exposure in "to" and "through" target-date funds is 14%. Equity exposure has implications for fund performance, risk, and expenses. Equity exposure's effect on performance varies by market conditions. In times of economic growth, funds with higher equity exposure may have higher returns, while in an economic downturn these same funds may have lower returns. In addition, equity is typically a riskier investment, and with higher risk comes a potential for greater rewards and losses. Equity funds are more expensive; therefore, target-date funds with greater equity exposure may be more expensive to the investor than target-date funds with less equity exposure. Investors need to be aware of the equity exposure of the target-date series, as well as whether the target-date series is "to" or "through" and the implications that has at the target retirement date and beyond.


Sasha Franger is a Fiduciary Research Analyst for Lipper.
In that capacity, she specializes in analysis of the expenses
and performance of mutual funds, writing papers,
and conducting research on pertinent industry trends.