A rising percentage of workers are turning to target-date
funds as a hassle-free way to save for
At the end of 2013, nearly $500 billion was in target funds.
Vanguard says 61% of members in 401(k) plans it runs that offer
target date funds use at least one.
That's up from 61% at the end of 2012.
With a target-date fund, the investor selects a year close to
the time of expected retirement. If the investor is young, the
fund is heavily into stocks, which carry greater risk, but also
As the investor gets closer to retirement, the percentage of
the fund in stocks falls and the portion of less volatile,
supposedly safer, fixed-income securities increases.
Take Fidelity's Freedom Funds. Say an investor signs up for
the 2035 fund. That means he expects to retire sometime around 21
years from now. The fund now invests 63% of assets in Fidelity
stock funds, 27% in bond funds and 10% in short-term funds.
As retirement draws nearer, the fund follows a "glide path"
that automatically rebalances away from stocks. Someone in a
Fidelity 2015 fund now would be 40% in U.S. equities, 17% in
international equities, 34% in bonds and 10% in cash equivalents.
Someone in a 2000 fund, who has already retired, would have 17%
and 7% in U.S. and international funds, respectively, 46% in
bonds and 30% in cash.
Glide paths can differ from one fund family to another.
"You're hiring a manager to do the asset allocation for you
and to change that allocation over time to match your risk
tolerance," said Janet Yang, target-date specialist for
Each fund family varies somewhat in approach, especially in
how much to put into equities.
As you shop for a fund, you should check the length of the
glide path for each fund you're considering. Many continue to
adjust that mix even after a fund reaches its target date.
Also, some use what Yang calls "tactical allocation" that
allows managers to react to unexpected opportunities. T. Rowe
Price bumped up its equity allocation in the aftermath of the
2008 financial crisis and benefited from it.
Target-date funds are not immune from the ravages of stock and
bond market crashes. After the financial crisis, when target-date
funds like other funds had trouble, Congress mandated more
disclosure from fund families.
Yang also noted that fund families typically put their own
funds into their target-date funds. But not every fund in a
family is a good one. Some funds might be subpar performers. She
said she has heard of some fund families seeding a new fund with
target-fund money, a practice she considers unethical.
Morningstar has concluded that, at least in recent years, a
fund family's choice regarding asset allocation might not make
all that much difference.
The low-equity Wells Fargo Advantage DJ Target 2015 delivered
similar returns to the equity-rich T. Rowe Price Retirement 2015
over a five-year period that included the 2008
"When people think about target-date funds, some become
obsessed with asset allocation," Yang said. "Their main concern
should be how much money they are saving. If they're not saving
enough, they won't have enough in retirement."