Weigh target-dates
A growing number of investors are finding convenience and instant diversity in target-date funds, which offer one-stop shopping for retirement savers who don’t want to worry about asset allocation and rebalancing.
Fund providers have noticed, and a plethora of new offerings have come to market in the last several years; there are now 133 funds from more than 20 companies, according to Morningstar Inc., and 94 of those are less than three years old.
Target-date retirement funds are baskets of mutual funds that become more conservative as an investor ages by automatically adjusting their asset allocation from equities to fixed income over time. The “target date” refers to the investor’s year of retirement, usually identified in the portfolio’s name. For example, a 30-year-old who plans to work for another 35 years might invest in the Fidelity Freedom 2040 fund (FFFFX). Among the newer offerings are 2045 and 2050 funds, which are geared toward retirement savers born from 1980 to 1985.
Target-date funds have become popular choices for employer-sponsored retirement plans, often serving as the default option for workers who are automatically enrolled. They aren’t right for everyone, however. If following the market and making trades gives you a charge, you may not appreciate the “set-it-and-forget-it” nature of this stand-alone option. But if you hate researching mutual funds and would rather leave the hassle of rebalancing your portfolio to professionals, they’re a good solution.
When evaluating target-date funds, the first factor to consider is asset allocation. The split between stocks and bonds can vary significantly, even among funds with the same target date. Another consideration is cost; the better shops will not overlay any additional management fees beyond what it would cost you to build the portfolio yourself. On the load side, fund providers typically stock their target-date offerings with institutional shares, which are less expensive, but 12b-1 fees bear watching.
Because these offerings are “funds of funds,” they’ll only be as good as their provider, so make sure you’re confident in the fund family. Not every company can cover all the bases well. Drilling down in this manner will also reveal other important details, such as the amount of exposure to foreign stocks.
What may be less revealing is the short-term performance figures of these portfolios. Given their changing asset levels and different philosophies, relative performance should be taken with a grain of salt, and trade-offs considered carefully. For example, while Vanguard’s index-focused offerings may be left behind in a strong rally, they may provide a smoother ride over the long term.
Of course, none of this is cast in stone; your fund provider may change its strategy as the years go by. Fidelity, which introduced the first target-date funds in 1996, made a number of changes recently following a review of old assumptions about mortality and spending levels.