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Some target-date mutual funds are riskier than others, here's how to choose the right one
Many retirement savers think they can put their investment choices on cruise control if they use a target-date fund.
These funds offer a mix of stocks, bonds, and cash that the fund manager automatically adjusts to become more conservative over time, based on the retirement date the participant selects.
But it's best to take a look under the hood before stashing your nest egg in a target-date fund.
Here are some tips for finding a target-date fund that is right for you.
Evaluate your risk tolerance.
Many target-date fund investors, including those near retirement age, recently suffered large losses. Long-term investors with a
retirement date between 2050 and 2055 had a median return of negative 47.5 percent between
Those on the verge of retirement didn't fare that much better.
Investors interested in retiring in 2010 had a median return of negative 31.9 percent. But losses varied considerably among funds because of the large differences in stock market exposure. Funds with a target date between 2050 and 2055 were invested between 51 percent to 95 percent in equities,
Consider the investment strategy of the fund.
It's not just the level of stock market exposure you should pay attention to.
The underlying investments also play a role in your returns. For example, target-date funds with larger allocations to developing and emerging international markets suffered greater losses than those invested more heavily in the U.S. stock market, according to recent Vanguard research.
Examine how the fund changes over time.
The combination of stocks, bonds, and cash in a target-date fund changes over the investor's lifetime.
Different fund managers have various strategies for how quickly the asset allocation is shifted from equities into bonds and cash. The fund's prospectus will generally contain an illustration of the glide path the fund manager plans to follow between now and the target retirement date. Make sure that strategy fits with your retirement and investing goals.
Aim for low costs.
High fund expenses can eat away at your returns over time. Fees vary from fund to fund and can change over time as the asset
allocation is shifted from sometimes pricey equities to low-cost bond funds. Target-date fund expense ratios generally vary
between 0.2 percent and 1.5 percent, according to
Pick the correct retirement age.
Most people choose a target date near when they actually plan to retire. But some investors tinker with their stated retirement age to get a more desirable asset allocation. Investors can pick a younger age if they want less risk in the fund or can take on more risk and potentially higher rewards by picking an older age.
"You could adjust the allocation by changing the retirement date that gives you the allocation you want but isn't necessarily the retirement date you plan on retiring on," says
Find out what happens after you retire.
There are actually two types of target-date funds: funds where the asset allocation remains static once your reach your retirement date, and funds that continue to grow more conservative in retirement.
"Find out if your target-date fund manager is really targeting the date in the name or if it is targeting some date way beyond that," says
Don't try to recoup losses with investments alone.
Over half of retirement savers (62 percent) think they will be able to retire on the target date they choose, according to a recent
online survey by
"The best way of dealing with the losses that have been suffered by individuals is not necessarily getting more aggressive or conservative with investments," says Ruloff. "Deferring retirement, not withdrawing funds, and continuing to put funds into your portfolio as you move toward retirement will definitely bring your assets back up."