Do Target-Date Investors Behave Better in Times of Market Turmoil?

by Mark Hebner and IFA Contributors - Friday, 12 September, 2014

Due to the auto-enrollment requirements of the Pension Protection Act of 2006, target-date funds have gained significantly in popularity in recent years. To gain the full benefit offered by a target-date fund, investors (or participants in defined contribution retirement plans) need to hold through all types of market conditions. If a plan participant bails out in the midst of a bear market, then it is a virtual guarantee that he or she will not receive the full upside when the market recovers and moves into new high ground.  The damage done to retirement savings may be insurmountable. Therefore, it is very important to know how target-date investors would be expected to behave in the face of a future bear market. Luckily, we have data points from two of the three largest providers of target-date funds, T. Rowe Price and Vanguard. Both of them pertain to the Global Financial Crisis of 2008-9.

According to this presentation from T. Rowe Price, while 14% of non-target-date fund users made a trade between 6/30/2008 and 3/31/2009, only 3.5% of target-date-fund users made a trade. As Jerome Clark, the portfolio manager of the T. Rowe Price target-date funds said in a recent Barron’s article1, “Holders were four times less likely to trade out of their target-date investments during the market plunge of 2008 than holders of other 401(k) investments.”

While T. Rowe Price evaluated plan participants who simply placed a trade, Vanguard conducted a similar study but limited it to participants that completely abandoned their target date fund or their equity position if they were not invested in a target date fund. The bar chart below shows the results:

Interestingly, plan participants who were defaulted into a target-date fund behaved better than participants who independently chose their target-date fund. The authors of the Vanguard study do not propose an explanation, but perhaps the former group was paying less attention to the headlines and therefore was less susceptible to placing ill-timed trades. One other thing that stands out in the above chart, in our opinion, is how low the capitulation percentages are, even for non-target-date investors.

For the past several years, we at Index Fund Advisors have advised the use of glide path for our individual clients. We are pleased to announce the availability of the IFA Target-Date Index Portfolios for both our individual clients and the retirement plans we advise. The chart below shows how the Target Date Index Portfolios will adjust their stock/bond allocations over time.

We believe that this will be a very unique product in the marketplace, as we have not yet seen a family of target date funds that is designed to capture the returns associated with the dimensions of small cap, value, and profitability. If you would like to learn more about IFA’s 401(k) offering, please visit

1Bary, Andrew, “Target-Date Funds Take Over”, Barron’s, 7/5/2014.