Research Vital to Finding Right Target-Date Retirement Fund
Andrew Leckey

Keep your eye on the target.

That's what investors in target-date funds should do in 2011. These popular one-stop retirement vehicles with more than $300 billion in assets are designed to shift your holdings into more conservative fixed-rate instruments as the date included in their name draws near.

Sounds basic enough, but there's more to it:

-- Even among those with the same target date, the portfolios, asset mixes and expenses vary among the funds offered by different investment firms.

-- They differ in how they adjust their asset mix, or "glide path," over the years. The 2008 market plummet revealed that some were still heavily into stocks even when investors were nearing their target date.

-- Some funds are designed to invest "to retirement" with a conservative allocation at the target date, while others are designed to carry "through retirement" as far as 25 years.

Your attitude toward risk, your age, your financial situation and when you'll actually need the money must be taken into account. For example, many funds have lately boosted their foreign stock holdings, and some of them hold lower-quality bonds. Decide what matters to you.

Transparency has improved following a public outcry after the 2008 problems. Government regulators also have applied pressure, proposing that even more information be provided by investment firms and employers in the future.

Nonetheless, if you don't get involved in this investment process, you may pay the price.

"Target-date funds didn't fail during the financial crisis," said Edward Lynch, managing director and chief retirement officer for Dietz & Lynch Capital in Newburyport, Mass. "The failure was on the part of the purveyor who did not communicate that all funds with the same target date are not alike."

There are around 50 different suites of target date funds available, Lynch pointed out, and that's why doing your homework is vital.

"Fund companies had been targeting a date many years beyond the date that was in the fund's name," said Joseph Nagengast, principal in Target Date Analytics LLC (www.ontargetindex.com) in Marina del Rey, Calif. "What investors should have been doing was taking their money out of the fund at the retirement date and starting a new strategy because the path that got them to retirement isn't the same one that works in retirement."

Differences become especially critical for funds of 15 years or less if managers are making investment decisions based on a date well past the target date, he warned.

Target-date funds have turned less adventuresome, though some may have become too careful.

"Some funds that were criticized for performing poorly in the 2008 stock market decline because they held too many stocks became much more conservative in their holdings," observed Greg Carlson, mutual fund analyst for Morningstar Inc. in Chicago. "However, that didn't position them well when the stock market rebounded, and they were left out."

Fund companies such as T. Rowe Price, Vanguard Group and Fidelity Investments provide a substantial amount of education about target funds, Carlson noted, but "they could do more because this is a different type of product than those to which investors are accustomed."

Find out how a fund works. For example, the glide path of Vanguard Group target funds begins with 90 percent equities and 10 percent bonds. Equities gradually decline toward a 50/50 split, before landing on a final 30 percent stock composition.

"The most important element to look at besides the target date is expenses, since these funds are designed to be held a long time," said Carlson, who says Vanguard is particularly adept at keeping costs down and who also likes the underlying fund investments of T. Rowe Price target funds.

Three moderate-risk 2025 target-date funds tracked by Morningstar have similarities (their largest stock concentrations are financials) and some differences (foreign holdings and bond quality):

-- Vanguard Target Retirement 2025 (VTTVX) has a 12-month return of 13 percent and a five-year annualized return of just under 4 percent. Fifteen percent of the stock portion is in foreign stocks. Three-fourths of the overall portfolio is in stocks. One-fourth is in bonds, with an average credit quality of AA and an average duration of just under five years.

-- T. Rowe Price Retirement 2025 R (RRTNX) has a 12-month return of 14 percent and a five-year annualized return of just under 4 percent. Eighteen percent of the stock portion is in foreign stocks. Seventy-seven percent of the portfolio is in stocks, 17 percent in bonds and the remainder mostly cash. Average bond credit quality is BB with an average duration of just under five years.

-- Fidelity Freedom 2025 (FFTWX) has a 12-month return of 13 percent and a five-year annualized return of just over 3 percent. Twenty-one percent of the stock portion is in foreign stocks. Sixty-four percent of the overall portfolio is in stocks, 24 percent bonds and most of the remainder in cash. Average bond quality is BB with an average duration of four years.

"Ask yourself when you plan to retire, what your overall financial picture looks like and what your tolerance for risk may be," concluded Nagengast. "In your company 401(k) plan there are likely target-date funds in five-year increments, so first find the fund that comes closest to your retirement date and then examine it closely."

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