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Encouraging Signs for Target-Date Funds

Our annual study shows that investors are continuing to use these prominent retirement savings vehicles well and costs are coming down.

Morningstar recently released its annual report on target-date funds, which are among the most prominent investments for workers saving for retirement. There are encouraging signs that investors use these funds well, and the funds often serve as key lifelines to asset managers' bottom lines. In addition to looking at trends such as these, this year's report examines Morningstar's best practices in evaluating target-date series. Here's a summary of the report's key findings.

Reaping the Rewards of Disciplined Saving
Properly evaluating target-date funds' performance is a complicated task, particularly given that these funds are intended as 60-year-plus investments designed to help workers be financially prepared for retirement. There are hints of a victory, though. Investor returns, a dollar-weighted return that takes into account cash inflows and outflows to measure the returns that investors actually experience, indicate that target-date investors generally buck a pervasive trend. Whereas most other broad categories show the effects of poor timing--investors tend to buy high and sell low--target-date investors largely avoid that fate. The return gap between a fund's investor return and published total return (see Exhibit 1) illustrates the point: Target-date investors have generally experienced results that are 74 basis points better than their funds' published total returns. Investors in other funds tend to experience negative return gaps.