BOSTON – Bracing for their year-end 401(k) statements, many investors who put money in 2010 target-date mutual funds may be facing a delayed retirement.
Target-date funds have recently become popular as a default option for 401(k) plans, in part because investors can take a hands-off approach. The funds automatically adjust to a more conservative asset mix approaching retirement and the fund’s target date.
Well, soon-to-be retirees who expected to emerge largely unscathed from 2008’s market plunge weren’t always so lucky.
Last year’s average loss was nearly 25 percent among 31 funds tracked by Morningstar Inc. with 2010 retirement target dates. That’s not that much better than the 33.8 percent hit the Dow Jones industrial average suffered in 2008, or the nearly 39 percent loss for the Standard & Poor’s 500 index.
And target-date funds, also known as lifecycle funds, are hardly created equal. Their strategies vary widely, which explains last year’s vastly different performance among funds with identical target dates, 2010 and otherwise. For instance, depending on which 2010 fund investors were in, their 2008 loss may have been as small as 3.6 percent, or as big as 41 percent.
Investors in target-date funds weighted more heavily toward stocks than less-volatile bonds must ask if they’ve got the stomach to stick it out after being burned last year. And they need to be aware that target-date funds are complex and merit scrutiny, even though they can appear on paper to be the investing equivalent of autopilot.
“The key part for target-date investors is understanding the allocations of the funds – as you would for any other mutual fund – and not closing your eyes,”’ said Lynette DeWitt of fund industry tracker Financial Research Corp.
Spokeswoman Jeaneen Pisarra said Oppenheimer’s target-date funds “offer capital income and appreciation up to and through retirement years. Like all products we offer, these funds are designed to be long-term investments. One-year results are not a true assessment of long-term performance.”
Despite target-date funds’ difficult 2008, the relatively new products continue drawing new investors because of their automatic portfolio-adjustment features, and their replacement of money-market funds as default options in many 401(k) plans.
Even if they are more complex than at first glance, target-date funds can be a good choice, particularly for disinterested investors. A Vanguard study found target-date funds helped moderate asset allocation extremes. Thirty percent of participants who didn’t invest in target-date funds had risky, all-equity portfolios, with 16 percent holding ultraconservative, zero-equity portfolios. Stock exposure of target-date fund investors generally ranged from 40 percent to 90 percent.
“They are still a very good one-stop shopping option for investors, especially for 401(k) investors who may not have a lot of investing experience,” said Greg Carlson, a Morningstar fund analyst.
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