ShareThisTarget-date mutual funds are marketed as a safe and easy path to retirement planning, but their recent poor performance is raising questions about the "set it and forget it" style of long-term investing.
Companies that offer target-date mutual funds make an implicit promise that people who invest in them will not experience great losses just before the time when they need the money. Yet the four largest target-date funds for people who are set to retire in 2010 lost an average of 25 percent last year, and one of them is down more than 40 percent.
In an admittedly tough economy, every one of the 264 target-date funds sold by the 39 mutual-fund firms lost money in 2008, according to a recent report by Ibbotson Associates, a Morningstar company. The smallest loss was 3.6 percent, and the largest was 44.5 percent.
"This concept of 'set it and forget it' sounds easy enough, but can actually lull individual investors into a false sense of security," said Mike Saghy, director of investments for PNC Wealth Management.
Target-date funds have gained popularity as retirement-investing options since they were created 15 years ago, and they picked up even more steam in 2006 after the Pension Protection Act allowed plan sponsors to make them default choices for employees who make no mutual-fund choices in their 401(k)s.
Also known as life-cycle funds and age-based funds, target-date funds let investors determine the year they want to retire, and as time goes by the fund automatically rebalances to be more heavily weighted with bonds and less invested in stocks as the target retirement date nears. Target-date-funds retirement goals usually are spaced five years apart: 2010, 2015, 2020, etc.
"The product is very impersonal when people believe it to be personal," said Paul Brahim, managing director at BPU Investment Management. "Clients somehow believe that mutual-fund companies know when they plan to retire and are protecting those assets.
"There is an assumption that by selecting the fund retirement date that it's the right asset mix for your accumulated assets and future spending. That doesn't mesh with prudent retirement practices."
Target-date funds have become widely accepted, mainly because people with little time or energy for retirement planning are overwhelmed by the thousands upon thousands of mutual-fund choices. But the unexpected steep losses in target-date funds prompted Congress to turn a spotlight on how they operate.
Sen. Herb Kohl, D-Wis., chairman of the Senate Committee on Aging, has asked the Labor Department to regulate the composition and marketing of these funds. He's also asking the Securities and Exchange Commission to scrutinize the disclosure and underlying composition of target-date funds.
The idea that the funds shift to more conservative investments as the target date nears can be misleading. In recent years, fund managers have become more aggressive for higher returns, and have assumed that investors will need to stay invested well past their retirement date to keep up with inflation, and have maintained a higher percentage of investments in stocks.
The percentage of stocks held in 2010 target-date funds last year ranged from 8 percent to 68 percent, according to a letter Kohl wrote to the Labor Department.
In market downturns, this type of strategy could wreck the retirement plans of investors who expect to withdraw their money on the target date.
"The actual asset allocation in similar target-date funds can vary widely from fund company to fund company," Saghy said.
As of the end of last year, about $180 billion was invested in target-date and life-cycle funds, according to Boston research firm Cerulli Associates.
Peter Miralles, president of Atlanta Wealth Consultants, said he believed target funds were still appropriate for some long-term investors. "A market tsunami is an unexpected event," he added.
(E-mail Tim Grant at tgrant(at)post-gazette.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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