Protection During Downturns

Art by Harry Campbell

Retirement plan advisers and investment managers agree that in periods of market volatility, managed accounts have served investors better than have target-date funds (TDFs) and target-risk funds, due to their ability to navigate changing markets.

“As managed accounts are actively managed, they can be more tactical and focus on specific areas of the market,” says Ken Van Leeuwen, managing director of Van Leeuwen & Co. “For example, if you look at two areas doing well right now, technology and cloud computing, investment managers can home in further in those areas and get more granular. TDFs are stuck in their glide path strategies and cannot be tactical.”

Darnel Bentz, senior vice president and senior wealth adviser with Kayne Anderson Rudnick Wealth Management, agrees that “managed accounts are better—that is, assuming they are selective and actively traded with 30 to 50 names and not ‘closet index funds’ with hundreds of stocks.”

But, Bentz explains, managed accounts that invest broadly and mirror index funds—i.e., closed index funds—will likely not produce excess returns to justify their higher cost.

Kurt Wedewer, regional president at American Trust Retirement, says one problem with target-date funds is that the set glide path can lead to selling low and buying high—or becoming conservative at the worst possible time.

But Liana Magner, partner in the U.S. defined contribution (DC) practice of Mercer, says, since the Great Recession, starting in 2008, near-retirement TDF vintages have scaled back their equity exposure. In 2008, they suffered a 14% decline, whereas in the first quarter of this year, they went down by 10.4%.

Doug McIntosh, vice president of investments at Prudential Retirement, says plan participants generally have been performing better in this crisis than they did in the Great Recession—largely because of the increased use of TDFs as the qualified default investment alternative (QDIA). In 2008, 60% of plans used TDFs as the QDIA. Now, 97% do. In addition, “Today, TDFs have generally taken down risk for those closest to retirement,” McIntosh says.

“The glide paths have gotten more conservative,” he notes. “As well, there are a broader set of asset classes utilized, such as TIPS [Treasury inflation-protected securities] and private real estate, to minimize equity volatility and inflation.”

Still, knowing their managed account is being actively managed also assuages investors’ fears during periods of volatility, helping them remain invested, Wedewer says.