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Target-date fund pros and cons

It certainly proved to be a problem during the market rout in 2008, when funds with a 2010 target date suffered losses of 23 percent on average, according to Morningstar, due to too much exposure to risky assets.

See if the fund with an imminent target date in your 401(k) lineup contains a mix of assets that you'd want in your year of retirement. In Muchler's experience, some people are too aggressive close to retirement. "They shouldn't be taking big bets on equity markets."

Rough agrees that this can be a problem: "We have folks who haven't saved enough for retirement and they want to take a lot of risks." A good target-date retirement fund would prevent that from happening.

But as Muchler points out, the allocation range varies greatly from one target-date fund to another. "There are companies that have you in 70 percent equities the year before retirement and others with 30 percent."

That reflects a difference in philosophy by investment management firms. Those offering funds with a high allocation to fixed income assume you will use the assets to buy an annuity at retirement, while those with high equity exposure assume you will leave the assets to grow in the fund through your retirement, extending your time horizon for 20 to 30 years.

Further, you'll want to investigate what funds they're actually holding. "This is where the biggest pitfalls occur," says Muchler. "Some companies use these funds as an easy way to boost sales of underperforming proprietary funds. If there's a fund that's struggling or that's new (and doesn't have a track record), they can keep it alive by adding it to a target-date fund."

Ten Haagen points out that in addition to a target-date fund being potentially too conservative or too aggressive, it may not be as diversified as you need, he says. "Does the fund have derivatives, real estate or commodities?" he asks.

The bottom line

To decide if a target-date retirement fund will work for you, you need to ask yourself how aggressive you are, what kind of risk you're comfortable with and what other financial resources you have, says Rough.

Keep in mind that you don't have to invest in the target-date fund that corresponds with your date of retirement, says Rough. If you're planning to retire in 2030, but want to be more aggressive over the length of your investment horizon, you can invest in a target-date 2040 fund. Or you can do the opposite if you prefer a more conservative approach.

You can drill down into the fund by reading the prospectus and the Web site associated with it. "Find out what funds and asset classes are used and how those change over time," says Muchler.

Ten Haagen also suggests looking at investment research information, such as that provided by Morningstar. "Is the fund consistently in the top quartile of its category in ranking and total return? If there's just one superstar manager, and he gets hit by a bus, who's going to take over?"

In the end, says Ten Haagen, "The bottom line is it's your hard-earned money. You should pay attention to it over time. ... If your approach is, 'I'm not going to pay attention to it,' then it's your fault that it doesn't work."

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