Net Gains: Hands-Free Investing Through Target Funds

The investment world can't seem to make up its mind about target-date mutual funds.

Some studies say they are too conservative and will not provide the returns future retirees need to finance their golden years. Others say these all-in-one funds are too aggressive, delivering too much volatility in the crucial years just before retirement.

And still other studies warn too many target-date funds charge excessive fees that act as a drag on investor returns. This one I believe, but that's not unique to target-date funds. The wise investor must always be aware of outrageous costs in nearly every type of investment vehicle.

From where I sit, the target-date mutual fund is a much-needed investment option for millions of workers whose only retirement plan is a 401(k) or other similarly defined contribution plan. These workers are responsible for all investment decisions even though many lack the knowledge or interest to build a retirement portfolio.

For them a target date fund may be the perfect solution.

A target-date fund is a mutual fund constructed with a particular retirement year in mind. That retirement year is the target date and usually indicated in the fund's name. For instance, a 2030 fund is intended for somebody like me who is due to turn 65 in or around the year 2030. A 2010 fund is meant for somebody 20 years older than me; a 2050 fund for somebody 20 years younger.

Target-date funds hold a diversified mix of stocks, bonds cash and possibly other investments, allocated in a way appropriate for the intended age group. For the youngest workers, target-date funds start out invested almost exclusively in stocks -- both domestic and international. Over time, as the target date approaches, the investment mix shifts to a more conservative one, shedding stocks little by little and picking up more bonds and cash.

Typically, they are offered in employer-sponsored retirement plans, but can be purchased by individuals, most often in an IRA.

In most cases, target-date funds are made up of various individual funds operated by the mutual-fund family that sets them up. For instance, Fidelity's Freedom Funds own only other Fidelity funds, and T. Rowe Price's Retirement Funds own strictly other T. Rowe Price funds.

Regardless of who runs them, target-date funds are meant to be an all-in-one investment solution.

In October, the Department of Labor designated target-date funds as acceptable default investments for 401(k) plans and other similar retirement savings plans that automatically enroll workers. As a result of that designation, target-date funds are only going to get more popular and may come to dominate retirement investing in the years and decades ahead.

Chances are if your 401(k) or 403(b) plan does not yet offer a menu of target-date fund options, it will soon.

Many financial planners dismiss target-date funds as overly simplistic and unable to meet the unique needs of particular individuals. True enough, I say. Target-date funds paint with a broad brush and can't handle the fine detail. But in my view they are appropriate and needed for many retirement savers.

When might a target-date fund be right for you?

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