Race To Retirement
Target-date fund assets exploded to $485 billion as of Dec.
31, according to Morningstar Inc. That was up 579% since 2005,
the year before their popularity began to soar.
The Pension Protection Act in 2006 OK'd their use as default
investments for people who are automatically enrolled in their
workplace's 401(k) plan.
They're also popular among people who don't want to make their
own buy and sell decisions.
U.S. diversified stock fund assets rose only 10.9% in the same
Target-date funds are the one-stop-shopping version of mutual
All you have to do is make three decisions.
Pick a fund whose target date matches your
Make sure that fund has the level of volatility you're
comfortable with as it travels to its target date.
Get a handle on whether the fund stops tweaking its portfolio at
the target date. Many continue to pare their growth stocks and
boost their bond holdings for years afterward.
That's it. The fund manager does the rest. He picks an initial
asset mix that is appropriate for your age and risk tolerance.
Then he typically fine-tunes that asset mix as you age, as you
approach retirement and as your desire for stability of principal
Some funds aim for more growth along the way, which can make
their annual gains and losses more dramatic -- bumpier.
Others sacrifice growth to give you a smoother ride.
Whatever style you choose, the fund manager makes all the
changes as years go by. That spares you from having to pick the
right mix of stocks, bonds and funds, changing that mix over and
over as you age.
Some target-date funds are better for you than others.
strategies can differ, even among funds with the same target
And do not confuse target-date funds with lifestyle funds.
Those -- sometimes called asset allocations funds -- start with
an asset mix that is growth oriented or more cautious. Unlike
target date funds, lifestyle funds don't change their
orientation. If one starts out geared for growth, that's how it
stays. If you use a lifestyle fund, you can shift by switching to
increasingly conservative lifestyle funds.
Don't overlook additional investment options for your
Many employers, consultants and regulators think target-date
funds failed to live up to their hype during the financial crisis
of 2008-09, says a McKinsey & Co. study. They did not shield
shareholders enough from the market downturn. The most
growth-oriented target-date funds -- with a 2050 or later target
-- averaged a 3.73% annual gain over the five years ended March
The most conservative funds, with a 2010 target date that's
already occurred, averaged 4.12%.
You would have been better off in a typical U.S. diversified
stock funds, which averaged 5.06%. "Diversification with funds
remains a key rule," said Judith Ward, a T. Rowe Price financial
Here are key points as you shop for a target-date fund:
Match your time horizon with a fund's.
That boils down to homing in on funds whose target date in
their name is the same as or close to your retirement date.
How does the fund invest?
Is it full of stocks or stock funds, aiming for growth?
Is it more cautious, aiming for growth with a smoother
Is it completely careful, putting a higher priority on
protecting its balance than on growth?
Or is it focused on generating income with little if any
attempt at price gain?
Check the facts at the fund's website or a researcher like
. Start by looking at how the fund is categorized. Then look at
what's in the portfolio. Look at the ratio of stocks to bonds.
Look at volatility measurements. Standard deviation shows how
widely a fund's returns vary over a specified period.
You're trying to determine if the fund's goals jibe with
And does its asset mix suit your risk tolerance? Don't buy a
fund unless the answer is yes.
Does it stop adjusting its asset mix at its target
The reason for checking this is because some funds keep
shifting to a more conservative asset mix even after their target
"Funds with the same target date may continue to rebalance
after their target dates," said Chris Sharpe, who co-runs $164
billion in 72 target-date funds for Fidelity Investments. "And
funds that continue to rebalance for the same number of years may
do so in very different ways."
The time when a fund stops jiggering its portfolio is
sometimes called its landing date. Check the website of a fund
you're considering. "And a customer service rep can tell you how
long a fund's glide path extends beyond the target date, and what
sort of changes it will make," Ward said.
What is its annual expense ratio?
Target-date funds have a reputation for being expensive.
Generally, they're not.
Their average annual expense ratio is 1.056%, according to
Morningstar Inc. That's less than the 1.273% average for U.S.
diversified stock funds.
Target-date funds' bad expense rep stem from the early days of
the industry when many of them charged a fee on top of the fees
charged by the funds in the fund. "Virtually all have eliminated
those overlay fees," said Josh Charlson, senior mutual fund
analyst for Morningstar.