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Target date funds: Retirement planning made easy?

The formula seems simple. Determine the year in which you want to retire and put a bull's-eye on the calendar. Go to your employer-sponsored 401(k) or IRA, or to your individual brokerage account, and find the "target date" mutual fund that matches your retirement date. Start pouring your retirement dollars into that one fund.

As the years go by, your fund is routinely rebalanced and becomes incrementally more conservative. The theory is that as your retirement date arrives, the changing asset mix will provide the proper recipe for stability and growth.

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Target date funds can help eliminate the confusion many employees and investors feel when faced with too many mutual fund choices in the typical 401(k). Each fund is a mix of cash, bonds and stocks, including in many cases some foreign stocks. The fund's name includes the retirement year, and the funds are usually spaced five years apart (e.g., 2010, 2015, 2020, etc.).

But too often, employees don't use target date funds properly, and you have to wonder whether one fund can really be appropriate for everyone who retires in a given year.

Tim Swartley, of the trust department at Univest Corporation in Souderton, Pa., cautions that the asset allocation of a particular fund won't suit the risk tolerance of all individuals who plan to retire in that year.

"Each fund family is different and each investor is different. The answer is different for each person. I might want to be as conservative as possible and that fund might still have 30 percent in stocks, when an individual may prefer to be 100 percent in bonds. People have to understand what they're buying, and many people don't peel back that layer to look at what's underneath."

Another potential problem is that employees aren't given enough information regarding the philosophy behind target date funds and how they should invest their money.

"The concept of the target date plan is a good idea," says Greg Kasten, founder of Unified Trust, based in Lexington, Ky., a company that devises employee retirement plans. "The participant has a single portfolio and a single solution geared, at least theoretically, toward a time frame. In practical reality, it doesn't work.

"The concept is one-stop shopping, but people don't do that. About 90 percent of the people who have money in the fund have it in there incorrectly. It's just another fund that they put their money in. They might have money in six other funds -- growth, value, etc., and then maybe 15 percent in target date."

While that problem might be fixed by better educating employees and other investors who consider these funds, another situation might be more perplexing to consumers. The asset allocation in a specific target date fund can vary from one firm to another.

Look at the 2015 target date funds from Fidelity, T. Rowe Price and Vanguard, and you'll see quite a bit of difference among them in asset allocation.

a Cash Stocks Bonds Other

The T. Rowe Price fund looks to be the most aggressive of the three with more than 66 percent of the portfolio in stocks, a mix the company finds appropriate for someone 10 years from retirement.

-- Posted: April 11, 2005




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