Despite the “implied” stability of target date fund retirement plans, market volatility still plays a role in participant behavior. Blackrock takes a look at the factors that can make a difference in retirement plan outcomes for plan participants.
Many people agree, the differences in fund selection can be quite substantial…and volatility is beginning to get a lot of attention when it comes to target date funds.
While target date funds behave in broadly similar ways by reducing risk throughout a working career, there are significant differences between funds. Performance is often looked to as a major differentiator, but 1, 3 and 5-year return snapshots cover only a fraction of the time a participant may be invested in target date fund. What’s more, performance numbers may mask considerable volatility. In this paper we review evidence that volatility may negatively affect participant behavior and consider whether a target date fund managed to reduce downside volatility may do a better job keeping participants invested so they can better benefit from a market rebound. Finally, we review the four risks that we believe target date funds need to manage, including market, longevity, inflation and behavioral.
Most participants, if they think about target date funds at all, assume that they all do largely similar things. They may have a vague understanding that the funds provide higher equity investment for younger workers and gradually taper off equity investments as they age. Within that framework, how much difference can there be?
