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Now that we've been fending for ourselves with respect to managing our own retirement plans for the past couple of decades, we're all professional investors, right? We know exactly which funds to buy in our 401(k) plans and IRA accounts. We also know how much to allocate to the various stock and bond fund options.
Well, maybe not. The Employee Benefit Research Institute
released a study that suggests we're muddling through investment decisions, often taking stances
that are way too conservative or, conversely, way too aggressive.
For
instance, about one-fifth of investors in their 30s, 40s, 50s and up to age 64
have all their money invested in interest-earning assets. That's too much exposure
to fixed income, no matter how old or risk-intolerant investors are. At the other
end of the risk spectrum, nearly one-third of investors in the same age range
invest 100 percent of their money in equities. That may make sense for younger
investors who have a long time horizon to retirement, but it's a pretty risky
bet for older investors.
Meanwhile, more than a quarter of
investors have a mix of bonds and stocks -- a good thing -- but with less than
50 percent allocated to the latter, riskier asset class. Some would judge this
to be too conservative for everyone but older investors.
These
figures come from the Survey of Consumer Finances, a study conducted by the Federal
Reserve Board once every three years.
One
solution: target-date funds
Target-date, target-retirement or life-cycle
funds, as they are interchangeably called, are becoming staple items in 401(k) plans these days. Some 30 fund firms offer them, and more are joining the fray,
most recently BlackRock, American Funds and OppenheimerFunds. Some observers predict
these funds will be the biggest money magnet in the industry over the next few
years for several reasons.
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| How target-date funds work, why they're popular: |
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Easy
solution for investors with no time
to research fund options in their
retirement plans. |
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Investors
choose the target date that coincides
with the year in which they wish
to retire. |
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As
target date approaches, the fund
shifts assets to a more conservative
stance. |
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Employers
can use these funds as default options
in automatic enrollment plans. |
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"They
are very low maintenance, one-stop shopping options," says Greg Carlson,
a fund analyst at Morningstar. "Some people have become overwhelmed by the
number of choices out there in the mutual fund arena, and they've lost some confidence
in their ability to build portfolios as a result of the recent bear market."
In
fact, with few exceptions, most of these funds opened for business during or subsequent
to the 2000-2002 bear market in which the stock market contracted by nearly 50
percent.
"After so many fund companies rolled out technology
funds at the end of the bull market and at the start of the bear market, they
maybe took a step back and realized they needed to offer something more diversified,"
says Carlson.
Mind you, the fund industry's motives had less
to do with concern about investor welfare and more to do with growing the business.
"It's better to have a fund where you're getting steady
inflows rather than sharp inflows and then steep outflows," Carlson says.
Short
track records
Because they're relative newcomers to the retirement-plan
scene, it's hard to predict what type of performance you can expect over the long
run with these funds. And investors who may want to look at how they're structured
-- to use as a guide on how to construct their own portfolios, perhaps -- will
be surprised to see how different they are, one from another.
That
means investors are not off the hook from performing due diligence before determining
if these funds are right for them. |
