Fidelity and Vanguard Ride the Direct Indexing Wave

Target Date Fund Underperformance

June 8, 2022

Bank of America has come up with some new research on an old favorite of many retirement savers: Target date funds. And they’ve found evidence of some significant long-term underperformance.

We’ve been long-standing critics ourselves of these funds. As a refresher, target date funds are designed to gradually de-risk a portfolio as an investor nears retirement, decreasing the fund’s equity holdings while ramping up its fixed-income allocation along a predetermined “glide path” as an investor approaches retirement. Many savers simply select a fund whose date syncs with their estimated year of retirement, and then “set it and forget it.”

But if they do that, they’re likely to be missing out. The Bank of America analysts reviewed a cohort of funds aimed at investors planning to retire in 2040. Over the past 28 years, the funds returned 750%, compared with 1,494% for the S&P 500 and 866% for a traditional 60% stock/40% bond balanced allocation.

What accounts for the disparity? Three things: First, many 2040 funds contain a significant allocation to foreign stocks; over the past decade or so, U.S. stocks have significantly outperformed their foreign counterparts. The funds also have an unsophisticated approach to their fixed-income allocations. While savvy bond fund managers have shifted their holdings to shorter-duration bonds during periods of rising rates, many target date portfolios have a duration of about six and a half to seven years.

But perhaps most problematic is the glide path itself. Rain or shine, bull market or bear, target dates reallocate a few percent of the portfolio to fixed income. That can mean investors are buying into bonds just when returns are at their worst, and they lag in their response to changes in monetary policy.

Target date funds have become a fixture of 401(k) plans in recent years, accounting for $3.27 trillion—over 40%—of total 401(k) assets.  Even savvy investors who spend considerable time fine-tuning other portions of their portfolio may turn to target dates as the best of a bad lot of limited options within their 401(k) plan. If you’re one, we’d urge you to take a second look (or talk to your portfolio team about whether we can help you find alternatives to your 401(k)’s basic menu of options).

Chart of the Week: Consumers Expect Higher Inflation

Note: Consumer inflation expectations line represents projected median one-year-ahead inflation rate. Actual inflation is represented by year-over-year consumer price index (not seasonally adjusted). Sources: U.S. Bureau of Labor Statistics, Federal Reserve Bank of New York Survey of Consumer Expectations.

Director of Research Jeff DeMaso:

Filled up on gas lately? Then you know: Inflation has been hurting consumers. What makes the recent bout of rising prices so irksome is that it was largely unexpected.

For nearly a decade, the New York branch of the Federal Reserve has been asking consumers how high they think inflation will be over the next year. As you can see in the chart, respondents have typically predicted it would be around 3%. And until recently, they were, for the most part, overshooting the target—from 2013 through early 2020, inflation averaged 1.5%.

That all changed coming out of COVID-19 shutdowns, with demand rebounding while supply chains fell apart. A war in Europe and lockdowns in China only made the situation worse. Coming into 2021, consumers were still expecting inflation of around 3%. But that year’s inflation clocked in at 7%. Consumers weren’t just hit hard. They were sucker-punched.

Now they’re adjusting their thinking on inflation. As of April (the most recent results available), those surveyed by the New York Fed now expect to see inflation of 6.3% over the coming year. Will inflation come down to meet their expectations or will consumers again be surprised by price hikes?

Only time will tell, but some policymakers have expressed the opinion that inflation has peaked.

Podcast: Keeping Credit on Your Side

Credit cards are ubiquitous. But they can also be pernicious. Even financially savvy consumers can find themselves tripped up by some of the terms and jargon. Luckily, financial planners Andrew Busa and Michael Dillaire are here to help. In this episode, they demystify the impact of revolving debt (like credit cards) on your financial plan, discussing:

  • Taking advantage of your perks
  • How many credit cards is too many
  • The ins and outs of credit scores
  • How to tell what card is best for your situation

Your credit cards can provide a clear window into your overall financial health. Let Andrew and Mike help you make the most of this everyday financial tool. Listen now to learn more!

Big News: We’ve Appointed a New CEO                                                                                                 

Chairman and Co-Founder Dan Wiener

After a lengthy search, I am thrilled to announce that Mario Ramos has joined Adviser Investments as our chief executive officer.

I first met Mario last summer when, over a terrific dinner, we got to know one another and our collective thoughts on both family and business. I knew then and know now that Mario is precisely the right person to lead Adviser Investments as we forge a future that continues to put our clients at the center of everything we do.

Mario has served in many executive and investment banking roles over his career—including as chief financial officer and chief risk officer of Edelman Financial Engines, a financial advisory platform with more than $250 billion in client assets. He also spent six years at consumer health giant CVS, culminating in the role of CFO of CVS Caremark.

Needless to say, Mario knows how to lead a client-obsessed organization such as Adviser Investments.

Even more important to me: Mario shares the values that have guided us from the beginning. He’s driven to deliver the best personalized care and customized services in the industry to our clients while fostering an environment where the best employees in the business can flourish.

As a four-year NCAA Division I soccer player, Mario is all about the “team.” I’m very glad to have Mario leading the team here, and he and I will be working closely together. Rest assured, I’m not going anywhere, nor is anyone else on your wealth management team.

Adviser Investments’ Today’s Market Takeaways

In recent Market Takeaways, Portfolio Manager Steve Johnson offered some sage advice for young adults graduating from high school and college, while Senior Research Analyst Liz Laprade discussed Elon Musk’s latest Twitter curveball.

We hope you find these episodes engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to info@adviserinvestments.com!

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Our statements and opinions are subject to change at any time without notice and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

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