Do Your Homework Before Investing in Target-Date Funds
Credit Card Reforms enacted by Congress
The ongoing and sometimes contentious debate over whether target-date funds have "failed" is missing some important points.
Target-date funds, the leading "default" option in workplace 401(k) plans, are mutual funds designed for people retiring in or close to a particular year.
For example, a 2025 target-date fund is intended for those planning to retire in or about 2025.
Rather than struggle to pick the right mix of funds and manage them on your own, you choose a single, broadly diversified fund. The target-date fund becomes more conservative as it approaches its "target" date, gradually shifting money from stocks into bonds and other fixed-income investments.
While this "one-stop shopping" and instant diversification are appealing, the timing for the widespread adoption of target-date funds dreadful.
These funds exploded in popularity in 2008, with assets briefly approaching
Under the Pension Protection Act of 2006, that designation meant employers could direct employee contributions into target-date funds if the employee did not specify a choice.
Long term, choosing diversified funds for our retirement savings makes sense.
But diversification was no shield in the brutal bear market last year. With both stocks and corporate bonds tumbling, even target-date
funds designed for people retiring as early as 2010 lost nearly 23 percent of their value on average in 2008, pushing overall target-fund
assets down to
In the wake of those losses, target-date funds have come under a barrage of criticism.
Lawmakers, regulators and consumer groups have thrown around a number of proposals, including standardizing the stock / bond mix of target-date funds, which varies widely among fund companies; capping how much they can put into stocks near their target date, and creating different versions, from conservative to aggressive, of same-year funds.
Much of this debate rests on the faulty assumption that target-date funds can be complete "solutions" for retirement planning and that legislation or regulation can "fix" them to deliver on that false hope.
Target-date funds, provided we understand them and match them to our needs, can be important building blocks in our retirement savings plan. But we may want or need other components, such as cash reserves for emergencies and accounts specifically designed to generate income streams, such as bond ladders or income annuities.
One proposal, in a white paper by
We also should not brand target-date funds as "failures" based on one year's results.
The 2008 bear market, "while devastating, is a short-term snapshot within decades of retirement saving and withdrawals," said
Ultimately - a point made in an analysis in the
- 10 Tips for When Your Unemployment Checks Stop
- New Student Loan Repayment Plan Is Based on Borrower's Income
- Cheap Eats: Experts Share Tips on Cutting Your Food Bill
- Women Face High Risk of Outliving Their Money
- The Benefits of Biking to Work Keep Adding Up
- Innovative Financial Web Sites & Tools Well Worth a Look
- Credit Card Accountability, Responsibility and Disclosure Act passed by Congress
- Higher FDIC Deposit Guarantee Extended to 2013
- Now Is the Time to Make Sure Financial Arrangements Are in Order
Personal Finances - Do Your Homework Before Investing in Target-Date Funds
(c) 2009 TRIBUNE MEDIA SERVICES, INC.