A recent article in The Wall Street Journal discussed how many target-date funds "missed their mark" in 2011. The article goes on to state that the average target-date 2015 fund lost 0.4 percent in 2011. This compares poorly with the S&P 500's gain of 2.1 percent and the Barclays Capital U.S. Aggregate Bond Index's 7.8 percent return.
Large losses in short-dated target funds in 2008 stirred much controversy that even led to congressional hearings. While the losses of 2011 were far less, questions continue to be raised about these funds and whether they are well suited for retirement plan participants and other investors nearing retirement.
Most target-date funds are funds of funds of the family offering the target-date suite. This is the case with the "big three," which consists of Fidelity, Vanguard, and T. Rowe Price. Together, they control about 80 percent of the assets in target-date funds. There some funds that invest in funds of various families, and even some that hold ETFs, but this is the exception.
To me, it's not that target-date funds are inherently good or bad. Instead, the problem is that many retirement plan participants do not fully understand what they are investing in. An additional concern is that some retirement plan sponsors do not perform the same level of due diligence on these funds as they do with the other investment vehicles offered in their plans.
Here are a few considerations to think about when determining whether a target-date fund is right for you:
--Are you comfortable choosing your own funds from the choices offered within the plan? If the answer is no, a target-date fund could be the right solution for you.
-- There might be other forms of advice available to you via your retirement plan. Many plans offer online advice tools and some offer in-person advice via a financial planner. These might be better alternatives for you in that the advice will be more tailored to your situation. By comparison, target-date funds are one-size-fits-all products. Additionally, if you work with a financial adviser for your outside investments, he or she should also be providing advice on your retirement plan holdings.
--You are not required to use the target-date fund with the target date closest to your anticipated retirement date. You are free to use whichever fund that best fits your goals and risk tolerance.
--Using a target-date fund does not guarantee that you will have a sufficient amount for retirement by the fund's target date. You are still responsible for determining whether the fund's allocation is appropriate and whether or not you are saving enough to meet your retirement goals.
Target-date funds are a great idea in theory; make one investment choice, then set it and forget it. In reality, there is no easy way to determine the best plan for ensuring a sufficient retirement nest egg.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner.
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