Target-Date Funds Lag Benchmarks

This is consistent with past observations, and is evidence of a variety of philosophies surrounding the appropriate level of equity risk—particularly as target dates approach.

According to the report, in the one- and five-year periods ending December 31, 2011, the average returns of further-dated target-date funds generally lagged the benchmarks.

For example, S&P data showed 80.8% of target-date 2010 funds were outperformed by the S&P benchmark over a one-year period. However, 85.7%, 84.6% and 89.0%, respectively, of target-date 2035, 2040 and 2040+ funds were outperformed by the S&P benchmark.

On average, target-date 2010 funds saw a one-year return of 1.30%, while the S&P benchmark had a one-year return of 2.87%. For target-date 2035 funds, the return was -3.12%, compared with the benchmark return of -1.46%. For 2040 funds, the returns were -3.45% and 1.93%, respectively.

This was primarily because as the markets turned around in March 2009, active funds were overweight with equities relative to the S&P Target Date Index. Asset-weighted average returns for the funds in each category were somewhat higher than equal-weighted returns, indicating that the larger target-date funds earned somewhat higher returns compared with their smaller counterparts.

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