BOSTON – Target-date mutual funds are supposed to simplify investment planning by automatically dialing down risk as you approach the day when you can finally call yourself retired.
Yet the recent market meltdown exposed how funds with the same target date can yield wildly different results. Nevertheless, the increasingly popular funds offer a decent option if you aren’t the type to periodically adjust your nest egg’s mix of stocks and bonds – a task that seems to perpetually reside at the bottom of to-do lists.
Shopping for a target-date fund can be a daunting task. The funds are relatively new, and their complexities are so great that new comparison tools from such names as Morningstar, Dow Jones and J.P. Morgan are geared toward financial advisers and retirement plan administrators, not individual investors.
For investors with the freedom to pick among the more than 40 companies now offering target-date products, good luck. The asset mixes in funds that attempt to ease you toward the same retirement date vary so widely that they defy simple apple-to-apple comparisons. Plus there’s a lack of easy-to-use tools to see how one fund stacks up against the next.
Despite recent market turmoil that sent many investors running to the exits, target-date funds’ growth hasn’t waned. The products – also known as lifecycle funds – took in nearly $42 billion from investors last year, according to the research firm Strategic Insight. Target-date funds first appeared on the market in the mid-1990s, and the more than 250 such funds now available hold about $180 billion.
Yet they’re misunderstood. Envestnet Asset Management, a Chicago-based firm that serves financial advisers, found widespread confusion in a recent survey. Nearly 40 percent of investors surveyed thought the risk levels in funds with the same target date would be very similar. And about 38 percent incorrectly believed the funds will produce a guaranteed return.
Part of what makes them difficult to compare is that most operate as funds of funds, meaning they spread money across several mutual fund offerings from the same provider. Managers gradually shift to more conservative funds and asset categories as retirement approaches.
So for now, individual investors are left with tools such as Morningstar’s Portfolio X-Ray, which helps analyze an investor’s asset mix across their entire portfolio. While the X-Ray tool can help assess the risk level of your portfolio, it isn’t tailored to evaluate target-date funds.
But with the funds’ growing popularity, the demand for easy-to-use comparison tools is likely to yield results sooner or later.
“It will be part of the education push the industry makes to advise investors, and help them feel more comfortable with target-date funds,” said Lynette DeWitt, a research director with Financial Research Corp. “After what happened last year, investors are saying, ‘Wow, I’m not sure if I should keep holding this fund, let me research it.’ ”
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