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What's The Crisis Done To Your Nest Egg?

Leslie Wayne has some bad news in today's New York Times about target-date mutual funds that are part of many 401(k) accounts:

...popular target-date mutual funds have badly missed the the stock market plummeted last year, some 2010 funds — which many investors thought would be invested safely by then to protect their nest eggs — lost 40 percent of their value. That showing was even worse than that of the Standard & Poor’s 500, which fell 38.5 percent.

While this sounds shockingly bad, it's worth pointing out that if only a few of these funds performed worse than the S&P 500, it wouldn't necessarily mean there is widespread poor judgement among target-date fund managers. The following chart shows a density plot for one-year returns of 171 target-date funds listed on Morningstar that had both "2010" in their names and data for one-year returns:

The red line shows the one-year return for the S&P 500 (Morningstar's and Wayne's numbers for the S&P 500 are a bit different. For the sake of consistency in the chart I used Morningstar's S&P 500 loss which was 31.45%). While only two funds earned positive returns in the past year, only six that did worse than the S&P 500. So the typical investor in these funds was better off than if they'd been in an index fund.

Still, 2010 funds as a category did worse than all bond funds over the past year which strikes me as a big problem. You'd think someone retiring in 2010 would want to be in a fund dedicated towards capital preservation, which bond funds (at least investment-grade bond funds) normally accomplish.  

Relatedly, the Urban Institute also has some interesting data on the effect of the financial crisis on retirement incomes. Among the baby boom generation, late boomers (those in their mid-40's now) have the rosiest outlook in the different simulations the institute ran:

Under all the scenarios, late boomers experience smaller income losses at age 67 than other birth cohorts. Because late boomers had fewer years to accrue wealth, they had less wealth (and fewer equities) to lose in 2008 when the arket crashed—even though they were more likely than earlier cohorts to have retirement accounts and to be invested in equities. 

Pre-boomers -- those in their mid-60's -- fare worse. Under a scenario in which the stock market recovers about half its value between now and 2017:

29 percent of pre-boomers lose between 2 and 10 percent of their income and 15 percent lose 10 percent or more. In contrast, only 15 percent of late boomers lose between 2 and 10 percent of their income and only 2 percent lose 10 percent or more.

--Zubin Jelveh