Target-Date Retirement Funds - Driving Into Retirement on Cruise Control

Target-Date Retirement Funds gradually change from a more aggressive, risky portfolio to a more conservative, safe portfolio as you get closer to retirement. They’re meant to take the worry out of retirement investing, but remember, you also give up a certain amount of control. These funds have become popular in the last few years. 4 of 5 major investment companies now offer them.

A few watch-outs to consider

Different funds have different ideas of what percentage ratio allocations should be used. Consulting Firm Watson Wyatt reports that stock/bond allocation ratios for “employees 10 years from retirement varied from 40 percent to 80 percent among target funds started in 2006.” Morningstar found that some funds closing in 2010 had as much as 70% stock allocations.

“The lack of consistent philosophies in this area means that products with very similar names can have very different compositions,” says Robyn Credico, national director of Watson Wyatt’s defined contribution practice.

Fund performance has varied widely. And many funds have only recently started, and so have no record of performance at all. Because of this, if these funds interest you, I recommend sticking with the big players. Vanguard, T. Rowe Price, and Fidelity all have excellent reputations as investment companies. We use T. Rowe Price.

As with any fund, annual expense ratios can also vary widely. Be sure to evaluate fund costs as well as gains when determining which fund is for you. Otherwise, high expenses can eat up those profits.

Examples of how allocations change over time in Target-retirement funds:

Target-Date Retirement Funds may not give you the highest possible returns, but for those struggling to understand the many options available, they’re worthy of consideration.

For more information, start here: Money Magazine’s latest Top Fund Picks and Why.

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