Is your target-date fund too risky?

In principle, Surz doesn't disagree. He also emphasizes that his view on target-date funds shouldn't be confused with advice on how a new retiree should invest for the years ahead. Depending on the investor's age, risk tolerance, net worth and other factors, some level of equity allocation may be appropriate. But that's a separate question from the asset allocation for a TDF nearing its target date, he says.

These products should be shepherding investors through the asset accumulating phase of their lives, followed by a gradual lowering of the equity allocation during the risk zone. When the target date is reached, the TDF should be prepared to turn over the assets to a new retiree. At that point, the investor can and should rethink his asset allocation strategy for the post-employment period ahead, says Surz.

New disclosure rules proposed

Is the issue simply one of proper labeling and letting investors make a decision? The SEC is leaning in that direction. The federal securities regulator recently proposed new rules that, if adopted, would require that target-date funds "disclose the fund's asset allocation at the target date immediately adjacent to the first use of the fund's name in marketing materials." By contrast, asset allocation strategy is unclear based on current target-date fund names, although one could always read through the prospectus for additional insight.

Regardless of whether the rule passes, protect yourself by understanding your target-date fund's strategy. Are you comfortable with the risk level in the portfolio? Does management clearly state its intentions for managing risk? If not, it may be time to sell and transfer the money to products that satisfy your risk tolerance and investment strategy.

Even if you believe that holding equity risk after retirement is appropriate, you should be confident that your life-cycle fund is the best product for that goal. But be aware that some target-date funds are designed for accumulating assets over the decades ahead of retirement. Expecting them to also function as post-retirement investment strategies may be asking for too much in some cases. And because you won't have a second chance to build a lifetime worth of savings, it may be best to err on the side of caution.

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