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In the past, target date funds for investors a long way from retirement would probably invest mostly in stocks with a little bit of bond exposure, often a 90% stock to 10% bond ratio. But on Thursday, T. Rowe Price, an asset manager which has $292 billion in assets under management in its target date funds, announced that it would increase these portfolios’ exposure to stocks over the next two years, starting in April.
The company would also add emerging markets exposure to these funds.
The adjustments to the so-called glide path changes the allocation for investors 30 or more years away from retirement from 90% to 98% stocks. The plans will hold the 98% constant and start the “glide path” towards lower stock exposure when an investor reaches the 30-years-to-retirement mark.
At retirement, the portfolios would have an allocation of 42.5% in stocks.
If an investor is lucky enough to live 30 years past their retirement age — potentially in their 90s — T. Rowe’s target funds would have them with 30% stocks in their portfolio, and the rest in safer investments like cash and bonds. That number in T. Rowe Price’s target-date funds now is at 20%.
Ultimately, it’s the rise of the stock market that propels investors’ nest eggs to retirement-worthy levels. According to Fidelity, the market all-time-highs have led its 17.3 million 401(k) balances to rise 17% from last year to an average of $112,300.
Changing the glide path
A target-date fund is a retirement savings option that invests in a wide, diversified array of stocks, as well as bonds. Over time, the portfolio shifts from being weighted heavily in stocks to more heavily weighted in bonds. They’re popular with 401(k)s because they’re a simple “set it and forget it” type of retirement investment plan.
These funds funds often have small corrections and tweaks within their asset allocations, designed to keep investors on the expected glide path. It takes a lot for a target date fund to change trajectory.
But recently, two things have been happening, although probably the second has a much larger influence.
First off, investors have been questioning the conventional wisdom surrounding bonds’ role in a portfolio, because bonds have become more volatile and return less. This is why some people are questioning the application of the venerable 60/40 portfolio.
But another thing is happening: people are living longer.
With 30 years or more until retirement, it’s likely there will be many economic cycles of expansion and contraction, and that stocks will eventually go up. With such a long window, T. Rowe sees it as entirely appropriate to almost completely eschew bonds as a hedge against market volatility. The hedge, in this case, is time.
T. Rowe cites another reason: the time is even longer. “Longevity risk” is now a factor investors consider (as if it’s not a good thing to live a long time), because many portfolios aren’t equipped for people into living well into their 90s. With a longer horizon, inflation risk adds another reason for T. Rowe’s equity push.