Competition for Target-Date Assets

Pimco, Invesco vie for assets using riskier assets, more complicated strategies.

Invesco Ltd. and Pacific Investment Management Co. are adding riskier assets and complicated strategies in target-date funds as they seek to gain ground on Fidelity Investments and Vanguard Group Inc. in this fast-growing segment of the U.S. retirement market.

While sellers promote the funds as a simple choice for people who don’t want to pick their own investments and rebalance them, money managers are using inflation hedges and derivatives to bolster returns. That broadening doesn’t address target-date funds’ main issues: uneven returns, higher expenses and an inability to provide for individual retirement needs, said Bob Pozen, a senior lecturer of business administration at Harvard Business School and former chairman of MFS Investment Management.

Jump in Assets

Invesco’s target-date fund for those retiring in 2020 returned about 9.8 percent last year with dividends reinvested, according to data compiled by Bloomberg. The average target-date fund lost about 1.6 percent last year, Morningstar data show, while the Standard & Poor’s 500 Index gained about 2.1 percent with dividends reinvested.

‘Tremendous Discrepancy’

The majority, or 53 percent, of plan sponsors that automatically enroll participants in 401(k)s use target-date funds as the default investment, according to a 2011 report by the Plan Sponsor Council of America, a Chicago-based trade group. There are more than 40 target-date mutual fund families employers may choose from and some sellers also offer them in collective trusts or customized versions, said Jeremy Stempien, director of investments for the retirement solutions group at Morningstar Investment Management.

Vetting the Funds

The proliferation of investment choices has made it harder for employers to shop for the best plans.

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