By NELLIE S. HUANG Kiplinger News Service on Aug 12, 2013, at 3:02 AM
Although target-date funds promise a one-step strategy for investing for retirement, there are no guarantees that they’ll achieve their goals -- or yours. These funds can lose money in any given year.
Performance among TDFs can also vary dramatically. Fees, the underlying funds in the portfolios, and the changing mix of stocks and bonds throughout the fund’s life span all play a role in determining how well, or how poorly, a fund performs.
Retirement plans typically offer just one target-date series from a single firm. That could mean the funds in your 401(k) are duds. Now what do you do? One easy, do-it-yourself solution: index funds, which are offered in many retirement plans. If you have four decades to go before you retire, consider investing 90 percent in a stock index fund and 10 percent in a bond index fund. Just bear in mind that bond prices fall when interest rates rise, so your bond fund may deliver substandard results until rates stabilize. And it will be up to you to adjust the allocation to fit your comfort level as you age.
If you do choose a TDF, knowing the fund’s glide path is crucial to understanding its risk profile. The glide path refers to the shift in a TDF’s allotment to stocks, bonds, cash and other asset classes over time. The further a fund is from its target date, the greater the allocation to stocks; the closer to its target date, the lesser the stock allocation. The move toward fewer stocks is deliberate because stocks are generally riskier than bonds and cash.
But each target-date series takes a different path. For example, although the typical 2050 fund -- designed for someone with more than 35 years to go before retirement -- has 90 percent of its assets invested in stocks, some have as much as 100 percent in stocks, while one has as little as 60 percent.
The closer you are to retirement, the larger the disparities. For instance, current stock allocations in funds dated 2010 range from 20 percent to 60 percent of assets. A major reason for such discrepancies is the way fund sponsors view the purpose of their glide path. Some glide paths keep adjusting until a fund reaches the target year, then stop. Most sponsors, however, adjust their allocations through the target year and beyond, into retirement.
You should feel comfortable with the glide-path strategy of your target-date fund from beginning to end. Read the fund’s prospectus, which will illustrate the life span of the path, to learn what happens to the allocation strategy as you near retirement and after you retire.
Nellie Huang is a senior associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit tulsaworld.com/kiplinger.
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As a group, the seven bond mutual funds in the Kiplinger 25 fared slightly better, but still suffered an average loss of 3.1 percent.
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