Kiplinger Today


Target Funds Under Fire

What's destined to become the most popular retirement-savings investment is sporting a bull's-eye. A growing chorus of critics have put target-date funds in their cross hairs, accusing them of being inflexible, too risky or too hidebound. Oh, yes, naysayers also say the funds lull you into a false sense of security.

That these fast-growing funds are catching flak from experts and each other isn't surprising, considering the vast amounts of dollars at stake. "All these new products need to differentiate themselves," says Luis Fleites, director of retirement research for consulting firm Financial Research.

How to Pick a Target Fund
ETFs Target Retirement

But don't let debate shake your faith. Much of the noise surrounding target-date funds is the industry overthinking a sweet and simple concept. Some of these funds remain great choices, especially our longtime favorites.

Target-date funds simplify long-term investing. Choose the year you wish to retire, then pick the fund with the date closest to your target. So, for example, if you're 35 and plan to retire in 2038, you'd choose a fund with 2040 in its name. These funds are a balanced meal of investments, complete with big-company stocks, small-company stocks, bonds and often less-traditional assets, such as emerging-markets stocks and real estate stocks.


As the fund approaches the target date, it becomes more conservative, lowering the percentage of assets in stocks in favor of more bonds and cash. This "glide path" is meant to dampen the fund's volatility, helping reduce the likelihood of big losses as you near retirement.

Money in target-date funds has grown like kudzu since their introduction around the beginning of this decade -- from $12.3 billion in 2001 to $168 billion at last word. The number of fund families offering target-date funds has jumped from a handful five years ago to 35 today.

That number is bound to rise, thanks to a recent ruling by Uncle Sam. The U.S. Department of Labor recently issued guidelines that place target funds on the short list of approved default investments in employer-sponsored retirement plans.

Getting aggressive

In an effort to improve performance and break from the pack, many target-date funds have boosted their holdings in riskier investments. While more-aggressive target-date funds topped out at 80% stock allocations three years ago, some now have as much as 94% in stocks, says Hewitt Associates, a human-resources consulting firm.

The growing slice of foreign stocks, in particular, underscores the push toward performance and the divergence among target-date funds. In recent years, one of the best ways to crank up a portfolio's performance has been to look overseas. The MSCI EAFE index, a widely used barometer of performance in developed foreign markets, returned an annualized 22% over the past five years to December 3. Standard & Poor's 500-stock index gained 11% annualized over that period.


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