Market volatility, catalyzed by the coronavirus crisis, has dominated the conversation in 2020. In the target date fund space, the built-in diversification, adjusted by age, endeavors to balance retirement savers’ asset accumulation with risk exposure — and has proved reasonably effective during this disruptive period.
Those closest to retirement are the most vulnerable to market swings, having the shortest runway to recover loss. Here, we will explore how “to retirement” funds fared during the first quarter — not only through the lens of wealth preservation, but also wealth accumulation.
By comparing the performance of State Street’s 2020 Fund (where a 65-year-old participant would currently be invested) to the 2020 funds of three large “to retirement” managers, we found that a State Street investor starting at the same dollar amount in 2010 would have accumulated meaningfully higher levels of wealth than investors with the other managers, even after accounting for slightly larger drawdowns at age 65.
In short, asset preservation is an important but insufficient condition for savings success. There must also be ample accumulation. By connecting these concepts, State Street Global Advisors balances volatility, longevity and inflation risks in concert with the long-term objectives that participants seek to achieve.
Figure 1: Ten Years of Wealth Accumulation in 2020 Target Date Fund Vintage