Target-date funds not a slam-dunk decision

Right now it appears that many boomers approaching retirement age really don't have a choice. They'll have to extend their working years out another five or 10 years, either because they haven't saved enough, their investments have contracted sharply -- or both.

In fact, that's largely the perception among many employers who offer retirement plans (also known as plan sponsors). In a recent survey of 1,089 plan sponsors, nearly half (46 percent) say their plan participants are considering a delayed retirement because of the recent economic turmoil.

Just for the record, AllianceBernstein's fund performance is not the worst of those sporting a 2010 target date. That dubious honor goes to Oppenheimer Transition 2010, which plummeted 42 percent in the 12 months ending November 14, compared to -39 percent for the Standard & Poor's 500. Ouch!

A little background

Beginning in 2008, target-date funds get safe harbor protection as qualified default investment alternatives, courtesy of the Pension Protection Act. That means that if you don't get involved in choosing investments yourself, employers who offer automatic enrollment can throw your retirement contributions into a target-date fund without fear of legal ramifications -- for the most part.

Roughly 30 percent of employers provide auto-enrollment, according to The breakdown of default investments used by companies with auto enrollment is as follows.


Hed: Default investments in 2008


By far, target-date funds are the most common default option, and they've grown in popularity in recent years. "It's worth noting that in last year's survey, target dates were the default in 33 percent of plans," says plansponsor's Adams.

Will lawsuits emerge?
Because target-date funds are sanctioned by the Department of Labor, employers don't have to worry too much that they'll be liable for market losses, at least theoretically.

However, some employers do have furrowed brows. Adams says that as part of its annual Defined Contribution Survey, employers were asked, "How concerned are you about litigation resulting from auto-enrolling participants into target-date funds where the underlying funds do not meet the IPS standards?"

IPS stands for investment policy statement, and this has been likened to an architectural blueprint for retirement plans.


Says Adams: "Over one in five (plan sponsors) were 'very concerned,' 43 percent were 'somewhat concerned.' Only about a third were 'not at all concerned.'"

It turns out that a lot of plans don't even have an investment policy statement in place, according to plansponsor's Defined Contribution Survey.

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