Guided fund still needs a checkup

PERSONAL FINANCE

May 27, 2008|By EILEEN AMBROSE

The development of retirement target-date funds has been a blessing to all of us who don't want to make investment decisions or adjust our portfolios on a regular basis.

All you have to do is choose a single fund based on the year you expect to retire, like 2020 or 2050. The fund does the rest. It makes the investment decisions for you, putting more of your money into stocks when you are young and can afford risk and gradually shifts more into bonds the closer you get to retirement.

But all target-date funds aren't alike - particularly when you near retirement.

Benefits consultant Watson Wyatt Worldwide says that funds with the same target dates but from different investment companies don't have the same proportion of stocks and bonds. For instance, funds for those expected to retire in 10 years had portions of stock ranging from 40 percent to 80 percent, according to 2006 figures. And some target-date funds held 20 percent in stock at the stage a worker retired, while others had up to 65 percent in stock, Watson Wyatt says.

FOR THE RECORD - Mike Finnegan's title was given incorrectly in Eileen Ambrose's column in yesterday's Business section. He is chief investment officer for Principal Funds.

"It's all over the board," says Darrin Farrow, chief executive of Pension Builders & Consultants in Ohio. "Each company has their own philosophy."

And depending on your circumstances, your target-date fund's philosophy could be too conservative or too risky for you as you approach retirement.

No one suggests you abandon target-date funds. They remain a good option if you're not a hands-on investor. That's one reason they are becoming a staple in 401(k)s, where workers without financial backgrounds are expected to make critical investment decisions.

When target-date funds are offered in a 401(k), more than 40 percent of workers use these funds, says Pamela Hess, director of retirement research at Hewitt Associates.

And as more employers start automatically enrolling workers into 401(k)s, employers have directed these workers' contributions into target-date funds. These are better than some other default options that are too conservative.

But as simple as target-date funds can make investing, you can't go decades without looking a little deeper at the fund you invest in.

"They do have a lot of virtues. But you do have to look under the hood," says Greg Carlson, a fund analyst with Morningstar Inc.

For workers in their 20s, the mix of stocks and bonds - asset allocation - in a target-date fund doesn't matter much. That's because target-date funds generally have the similar asset allocation of 90 percent or more in stocks, says Mark Ruloff, director of asset allocation for Watson Wyatt.

Ruloff suggests once workers are 10 or so years away from retirement, they should look at the asset allocation of their target-date fund and see if it fits them.

Many investment companies in recent years, for instance, have boosted the stock holdings in their target-date funds geared for older investors.

Mike Finnegan, chief investment officer with the Principal Financial Group, says the industry is now looking at target-date funds as not just as an investment to get you to retirement, but to carry you through life. And to do that successfully, target-date funds have added to their stock holdings to provide needed growth to keep up with our longer life spans, he says.

Principal, one of the largest players in target-date funds, now holds 53 percent of assets in stocks for workers in their early 60s, and gradually reduces that to 20 percent by the time retirees are in their late 70s.

So, if you're a decade or so away from retirement, ask this of your target-date fund: Does it meet your objective and risk tolerance?

Consider how the fund fits with your other retirement resources, too, Ruloff says. For instance, someone with a generous traditional pension and other savings might feel less need to have a target-date fund with a sizable percentage in stocks.

Also, consider your age, Farrow says. Someone retiring in 2020 at age 55 might want a portfolio with more in stocks than a 70-year-old retiring the same year.

Maybe your fund fits you perfectly. If not, you can switch to another fund whose asset allocation is a better match for you. The farther out the date, the more the fund will hold in stock.

eileen.ambrose@baltsun.com

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