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Fidelity Shifts Target-Date Retirement Funds More Toward Stocks

September 26, 2013

Fidelity Shifts Target-Date Retirement Funds More Toward Stocks

A pedestrian passes a Fidelity Investments branch in New York. Photograph: Victor J. Blue/Bloomberg

Fidelity Investments, the largest provider of 401(k) plans, is putting more stocks into its target-date retirement funds in anticipation that returns for bonds will weaken after a historic bull market.

Fidelity is increasing the allocation to equities by as much as 15 percentage points for investors under age 67 and shrinking the amount of fixed-income holdings for retirees, the Boston-based firm said today in a statement. With the change, Fidelity’s asset allocations will be more like those of its primary competitors in target-date funds.

Target-date funds, the most common default option employers offer to U.S. workers in 401(k) plans, automatically shift from investments considered risky, such as stocks, to more conservative assets like bonds as investors get older. With interest rates rising from record lows and investors including Bill Gross predicting an end to the 30-year rally in fixed income, savers run the risk of subpar returns or even losses from bonds if their allocation changes at the wrong time.

“It really does change the dynamic of buy it and put it away both for the investor and the adviser of these target-date funds,” Geoff Bobroff, a fund-industry consultant based in East Greenwich, Rhode Island, said of rising interest rates. “We’re going to see some new versions or different forms of diversification in target-date funds.”

Fidelity holds $172 billion of the more than $556 billion currently in U.S. target-date funds across the industry and the largest market share with 31 percent, according to Chicago-based researcher Morningstar Inc. (MORN:US) Target-date assets are expected to double to $1.1 trillion by 2017, according to Boston-based researcher Cerulli Associates.

Vanguard Group

The more-aggressive mix will bring the makeup of Fidelity’s lineup closer to that of competitors Vanguard Group Inc. and T. Rowe Price Group Inc. (TROW:US) The three firms dominate the target-date market, together controlling about 75 percent of assets, according to Morningstar data.

Equity allocations at Valley Forge, Pennsylvania-based Vanguard’s funds are about 90 percent for those under age 40. They decline to 50 percent at age 65 and 30 percent by age 72.

T. Rowe Price’s main target-date funds also have about 90 percent in stocks until age 40 and move to 55 percent at age 65. Thirty years after retirement, the level drops to 20 percent. The firm, which is based in Baltimore, introduced a more conservative target-date series this year that moves to an equity allocation of 42.5 percent by retirement.

Glide Paths

Providers use different asset mixes based on investors’ ages depending on what the firms call their glide path. Fidelity manages the investments to replace about 50 percent of investors’ final salary through age 93, said Bruce Herring, group chief investment officer in the global asset allocation division.

Fidelity is changing the mix to keep a 90 percent target allocation to equities until workers get to age 48, compared with about 75 percent by that time previously. The shift will end at a low of 24 percent in stocks and about three-quarters in fixed income or cash by the time investors reach age 84. The changes will take effect on or about Jan. 1, Herring said.

The decision was based on the savings behavior of the more than 12 million participants in 401(k) accounts Fidelity manages and on the firm’s outlook for market returns, Herring said.

“Our expectations for bond returns are much lower than they used to be,” said Andrew Dierdorf, co-portfolio manager of Fidelity’s target-date strategies.

Surging Yields

The prospect of lower gains from fixed income increases the importance of equities in achieving long-term goals, Dierdorf said. Returns from bonds still are likely to outpace inflation, he said.

The Fidelity Freedom 2020 Fund, a target-date product designed for those who will reach retirement age in that year, lost 0.3 percent from June through August, according to data compiled by Bloomberg. During that period, the Federal Reserve said it might reduce its monthly bond-buying purchases this year, which sent benchmark 10-Year (USGG10YR) Treasury yields to as high as 2.89 percent from as low as 1.63 percent in early May.

Target-date funds were scrutinized after the global financial crisis, when those designed for investors nearing retirement lost an average of 37 percent as U.S. stocks slumped from October 2007 to March 2009, according to Morningstar. The funds labeled 2010 had recouped losses on average by 2011, Morningstar said.

‘De-Risking People’

Even in the worst market declines of the last 100 years investors have been able to recover their losses within 20 years, Herring said. That’s why Fidelity decided not to lower its allocation to stocks until people came within two decades of retirement age.

“We thought de-risking people in their thirties and even early 40s was premature,” Herring said.

The target-date market has become increasingly competitive since 2006, when the U.S. government declared the funds a qualified default option for employers to use in 401(k)s. Fidelity’s market share declined to 31 percent as of August from 48 percent in 2006, according to Morningstar.

To contact the reporter on this story: Margaret Collins in New York at mcollins45@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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Companies Mentioned

  • MORN
    (Morningstar Inc)
    • $66.74 USD
    • -0.24
    • -0.36%
  • TROW
    (T Rowe Price Group Inc)
    • $83.47 USD
    • 0.36
    • 0.43%
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