Missing the (Retirement) Mark

Missing the (Retirement) Mark

For those who want a care-free saving strategy, target-date funds — which are pre-set portfolios that automatically adjust their mix of stocks and bonds as retirement approaches—have proven an appealing option.

Target-date funds skyrocketed in popularity after 2006, after a federal law allowed them to be a default option in 401(k) plans. The funds held $160 billion collectively in 2008, but accounted for over $550 billion by the end of May this year, according to investment research firm Morningstar.

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Over 39 million employees nationwide now have their money invested in target-date funds, according to the company BrightScope. Younger workers are also more likely to opt in—61% of 20-somethings who have plans tracked by Fidelity put their entire retirement accounts in a target-date fund.

Target-date funds aim to make the most of a nest egg by setting the proportion of money invested in stocks versus bonds to shift automatically toward bonds as the investor gets closer to retirement. It is a solid, time-tested strategy—take risks with stocks now to grow your savings, and safeguard them later by investing in lower-risk bonds, all without paying someone to manage your money.

Misfires With Target-Date Funds

But are the benefits of target-date funds too good to be true? According to a 2012 survey by the Securities and Exchange Commission, 25% of investors mistakenly believe that their target-date funds would ensure them a certain amount of income when they retire.

In reality, some target-date funds can charge exorbitant fees, and be composed of many individual funds whose different investment approaches are hard to track. Even funds with the same end-date can distribute investments among stocks and bonds at different percentages, making some more risky than others. While target-date funds do offer benefits to many types of investors, it can be difficult to tailor them to meet individual needs.

"The whole idea of target-date funds is that there's some sort of smooth glide path," says Zvi Bodie, a finance professor at Boston University, told the Wall Street Journal. But, "you're going to have to make corrections along that path."

Still, target-date funds have proven a relatively low-risk option for easing people—who would otherwise keep their money on the sidelines in cash—into investments that potentially provide a higher return.

"In general, target-date funds are great for investors and do a better job of diversifying a portfolio across multiple asset classes than most investors can do on their own," Jeremy Stempien, an investments director at Morningstar, told the Wall Street Journal.

RELATED: When $1 Million Just Isn't Enough

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