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Target date funds: Retirement planning made easy? -- Page 2

"Statistics on life expectancy say that for a couple who are 55-years-old today, the odds of one of them living to age 95 is 45 percent. The demographics drive our growth-oriented approach," says Jerome Clark, the company's portfolio manager of retirement funds.

"Throughout the life of the investor they stay in the one fund. At 2015, they don't move into an income fund. They continue to move down to a more-conservative mix until they reach 20-percent equities."

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Clark also says the notion that many people who invest in a target date fund also allocate money to other funds does not apply to most investors at T. Rowe Price. He says that a recent analysis of their largest plan sponsors shows that approximately 90 percent of people participating in a target date fund use that as their primary investment option.

For his clients, Kasten's company opts for a managed model portfolio with very clear asset allocations.

"We do fiduciary monitoring of each one, and then we optimize asset allocation for the participants. We give them easy labels such as 100-percent fixed income. If you're in 40/60, you know you're holding 40-percent stocks and 60-percent fixed income. There's no misunderstanding as to what you're invested in. If a participant has us put together a model, it's the only way they can have their money invested. That keeps them from putting just 20 percent in the fund. They can take their money out tomorrow if they want, but 80 percent to 90 percent leave it alone."

Kasten, a certified financial planner, is also a medical doctor who 20 years ago was a practicing anesthesiologist. He's a firm believer that most 401(k) plans come up short in addressing the retirement needs of employees.

"Imagine I sell you a health insurance plan where you go to the hospital and all you get are brochures and pills and you have to figure out your own symptoms and what pills to take. That's what most 401(k) plans are like."

Another financial planner, Dan Casey, president of SeniorPlus in Mount Clemens, Mich., says he gives his clients a basic risk tolerance questionnaire and uses their answers to help build an appropriate portfolio.

"I show them the worst three-month period and the worst one-year period for that portfolio in the last 10 years and ask if they can handle that. We've seen it all in the last 10 years, the post-9/11 markets and the great booms."

The target date funds from Fidelity, T. Rowe Price and Vanguard are too new to consider their track records, but consumers should check the performance of any target date fund to see if it at least matches the performance of a benchmark index or category.

Target date funds can relieve consumers of the need to constantly monitor investments and re-jigger asset allocation. But you need to examine the asset allocation and be sure that it fits your tolerance for risk. If the fund is too conservative or too aggressive for you, it may be best to consider other options.

Another potential weakness is that most fund companies will use a roster of their own funds in a target date portfolio. Not every company does a great job across the board. One fund company may have stellar small cap funds, but its large cap funds consistently lag their competitors. You'll have to decide whether that drawback will be too much of a drag on the fund's performance.

-- Posted: April 11, 2005




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