An increasing number of workers will find a new option in their 401(k) plan this year: "target-date" retirement funds.
Target-date mutual funds are designed to provide one-stop retirement shopping for someone who doesn't want to worry about asset allocation -- a portfolio's mix of investment types such as stocks, bonds, cash, real estate and international securities.
"The beauty of this product is that once you select one, it does everything for you automatically for the rest of your life," said Jerome Clark, portfolio manager of T. Rowe Price retirement funds.
Each target-date fund is designed for investors who are likely to retire in or near a particular year. The fund invests in other mutual funds to get a broad mix of assets. As the target date approaches, the mix of those assets is adjusted to become more conservative. For example, a 23-year-old could invest now in a fund with a 2050 target date and not have to think much about it for more than 40 years.
Because of their "set it and forget it" appeal, target funds have been soaring in popularity. They hold about $180 billion in assets, up 55% from a year ago, according to fund tracker Morningstar Inc.
Their use is sure to grow this year as more employers, encouraged by new regulations, offer them in company-sponsored retirement plans.
Despite their simplicity, there can be differences among companies' target-fund offerings. That's because different investment managers have different ideas about the best mix of assets for any given situation.
With that in mind, here's a look at how target funds work and how you can determine whether a particular fund is appropriate for you.
If I plan to retire in 2020, can I assume that a retirement fund with a 2020 target date is right for me?
Not necessarily. Two funds that have the same target date but are managed by different investment firms can have significantly different asset allocations.
For example, let's look at the 2010 target funds offered by Payden & Rygel, Vanguard and T. Rowe Price:
Payden's 2010 fund holds just 38% of its assets in U.S. stocks, 16% in foreign stocks, 41.5% in bonds, 4% in real estate and 0.5% in cash.
Vanguard's 2010 fund has 44.3% in domestic stocks, 11.2% in international stocks, 4.5% in inflation-protected securities and 40% in bonds.
T. Rowe has the highest proportion of stocks in its mix, with 48.9% in U.S. stocks, 12.3% in international stocks, 33.9% in bonds, 4.7% in cash and 0.2% in convertible securities, usually bonds, that can be converted into stock.
