For people who lack the time, expertise or inclination to put together their own retirement portfolios, asset management firms have increasingly marketed "target date" mutual funds as a no-worry, hassle-free solution.
The idea: You put the bulk of your retirement savings into a fund pegged to your target date -- the approximate time you expect to retire. Over the decades, without any action by you, the fund's holdings gradually become more conservative, leaving you with a comfortable nest egg.
It hasn't exactly worked out that way, so far at least.
Many target-date funds -- even those for investors in or near retirement -- have suffered stinging losses in the current bear market.
For example, funds designed for people who have already retired or expect to by next year -- portfolios that you would normally want to be relatively low risk -- have lost on average a quarter of their value over the last 12 months, according to fund tracker Morningstar Inc. Two funds lost more than 30% and one skidded more than 40%, even after counting dividends paid.
The wide variation in performance largely reflects the funds' varying degrees of exposure to stocks -- the higher the stock allocation, the worse the loss in the last year -- and have reignited a debate about how much in stocks is too much for people closing in on retirement.
The target-date struggles show the need to carefully assess a fund's holdings and investment philosophy to determine how they mesh with your financial circumstances and overall portfolio.
"This bear market has underlined the risks of target-date funds," said Greg Carlson, a Morningstar analyst. "Target-date funds are a very viable choice, but you really do have to look under the hood."
Target-date funds, which fund companies began marketing in the late 1990s, have grown quickly in popularity and now hold $140 billion in assets, an impressive amount but only about 1.5% of the $6-trillion total invested in U.S. mutual funds. Boosting that growth, legislation enacted in 2006 allows employers to use target-date funds as a default destination for employees' 401(k) contributions -- the rationale being that a target-date fund would probably be a suitable retirement investment for practically anyone.
A target-date fund typically invests in other mutual funds managed by the same firm, usually at least a stock fund, a bond fund and a money-market fund.
