No-brainer target-date funds

If the thought of researching investment options leaves you cold, there’s good news.

So-called target-date funds are designed to take the stress out of investing by automatically allocating assets according to investors’ ages and retirement deadlines. That means you invest and leave the work to fund managers.

Indeed, target-date funds are relative newcomers, but are proving popular with companies and employees. According to a study by Olivia S. Mitchell at The Wharton School and Stephen P. Utkus at Vanguard Center for Retirement Research, from 2000 to 2010, assets rose from $6 billion to $245 billion.

Their appeal

Target-date funds are designed to keep investors on track to reach retirement goals by putting more asset allocation decisions into the hands of the managers who run them. Like other mutual funds, target-date funds invest in a diverse array of stocks, bonds and cash. Many are funds of funds — that is, they are composed of several other funds. As time passes, target-date funds automatically rebalance their holdings to become more conservative.

But convenience comes with some warning. These funds’ one-size-fits-all approach is misleading since funds can differ greatly, depending on who runs them, says Paul Mladjenovic, a certified financial planner and author of “Stock Investing for Dummies.”

“The mix will depend on the fund administrators. All the firms that have plans have different presumptions in place, so some are more growth oriented, some less so. When you choose a target fund, look at the categories that make up the mix for that particular fund,” says Mladjenovic.

Some research still required

For example, let’s say your target retirement date is 2020. You could buy a target-date fund bearing that date from numerous fund firms. T. Rowe Price and Fidelity Investments both offer funds with that target date. The Fidelity Freedom 2020 fund has more than 60 percent of its holdings in stocks. T. Rowe Price Retirement 2020 fund has more than 65 percent in stocks.

A target-date fund comparison

T. Rowe Price Retirement 2020 Fidelity Freedom 2020 Fund
  • 43.4% domestic stocks
  • 21.9% foreign stocks
  • 30% bonds
  • 3.7% cash
  • 40.4% domestic stocks
  • 20.3% foreign stocks
  • 31.7% bonds
  • 7.1% cash

Which is best? That depends on personal factors, such as your financial needs and risk tolerance, says Mladjenovic.

One place to investigate target-date funds is, where you can compare the underlying assets of the funds as well as performance history and expenses. Here again, personal advice from a financial adviser may help.

That’s another way of saying that while target-date funds may take much of the worry off your mind, you don’t get a free ride. After all, even when on autopilot, a plane needs someone to keep an eye out for the runway.