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More Investors Choosing Target-Date Funds for Retirement Savings

Posted By Carole Fleck On April 1, 2014 @ 4:49 pm In Money Talk | Comments Disabled

business graphs [1]Target-date funds are growing in popularity among investors in workplace retirement plans [2] because they’re so easy to manage. You pick a retirement date, and the mix of investments automatically adjusts to a more conservative allocation as you move closer to that date. No muss, no fuss.

If you’re not investing in a TDF, chances are you will be. A new study [3] says that by 2018, nearly two-thirds of all 401(k) [4] savings contributions will go into these funds.

TDFs have become fixtures in workplace retirement [5] plans in recent years. To understand their trajectory, consider that in 2005, target-date funds had less than $100 billion in assets. In 2013, they held some $500 billion in assets, according to a recent Morningstar report.

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Target-date funds were designed to take much of the guesswork out of retirement planning. The set-it-and-forget-it auto rebalancing feature, which reduces stock market exposure by altering the allocation among stocks [7] and bonds the closer you get to your target date, is primarily what makes them so appealing to people. If your retirement date is 2030, for example, your portfolio that year might be 30 percent in stocks and 70 percent in bonds.

There’s no guarantee of a specific return; likewise, the risk of loss is possible as with any investment. Also, TDFs aren’t cheap, but their fees have come down. The asset-weighted average expense ratio was 0.91 percent in 2012, down from 1.04 percent in 2008, according to Morningstar.

Financial planners say TDFs may be a smart default solution for 401(k) participants [8] who lack the time, interest or knowledge to manage their portfolio. That said, is a generic one-size-fits-all approach to retirement planning and investing the best strategy for you?

“The one thing people need to know is that companies have different allocations – they can be significantly different – for the same target date,” says Ben Muchler, a certified financial planner and managing partner at Boston Research and Management. “There’s no set industry standard for what a 2030 portfolio should look like. That’s the challenge here. What is the right allocation for someone five years away from retirement?”

Workplace retirement plans typically offer a range of TDFs with varying projected retirement dates – the longer the time horizon, the higher the concentration of stocks versus bonds. Clearly, it’s important for plan participants to know the investments in a TDF and to understand how the allocation shifts over time. Some critics say that investors could end up with a portfolio too heavily weighted in bonds and consequently not enough growth to fund, say, 30 years in retirement. Or a rebalancing approach may expose an older investor to a higher share of equities – and risk – than appropriate.

“Target-date funds may not be ideal for every investor, but they’re a better solution on average than each person being their own portfolio manager,” says David Blanchett, head of retirement research for Morningstar Investment Management.

Morningstar [9] in a recent research paper analyzed the average industry glide path (the formula that shifts the asset allocation mix as you get closer to your retirement date) and found that TDFs will meet most retirees’ spending needs to about age 85. After that age, the results differed. Those who held TDFs with less exposure to stocks had a higher risk of outliving their savings. (See page 66 [9] for rankings on TDFs).

Wendy Weaver, a certified financial planner and portfolio manager at FBB Capital Partners in Bethesda, Md., says TDFs are beneficial for young workers just starting out with a long time horizon. For near-retirees, the lack of control and personalization may not serve them well.

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“Controlling what you can is really important as you get closer to retirement. You don’t want to be too conservative too soon,” she says. “It’s important to understand … how quickly TDFs transition to a more conservative portfolio.”

Cathy Peterson, global head of retirement insights for JP Morgan Asset Management, says “you do have to check in along the way” with TDFs, particularly if, for example, you decide to stay on the job longer or some other decision or situation alters your retirement plans.

Peterson also made this salient point: “No asset allocation can fix or solve for the lack of savings in a plan.”

Saving adequately for retirement is still the best determinant for a good outcome.

 

Illustration: n-trash/iStock [11]

 

Also of Interest

 

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URL to article: http://blog.aarp.org/2014/04/01/more-investors-choosing-target-date-funds-for-retirement-savings/

URLs in this post:

[1] Image: http://blog.aarp.org/wp-content/uploads/2014/04/HiRes.jpg

[2] retirement plans: http://blog.aarp.org/2014/03/21/youre-over-50-now-what-carrie-schwab-pomerantz-tells-you/?intcmp=AE-BLIL-BL

[3] study: http://www.401khelpcenter.com/press_2014/pr_cerulli_032614.html#.Uzl47BYUD18

[4] 401(k): http://blog.aarp.org/2014/03/11/401k-fees-need-more-transparency-labor-dept-says/?intcmp=AE-BLIL-BL

[5] retirement: http://blog.aarp.org/2014/03/18/whos-feeling-better-about-retirement/?intcmp=AE-BLIL-BL

[6] >> Sign up for the AARP Money newsletter: http://www.aarp.org/online-community/people/subscribeFromEmail.action?id=29636&intcmp=ILC-EMAIL-SUB-MONY

[7] stocks: http://blog.aarp.org/2014/02/18/stock-gains-push-401ks-to-record-highs/?intcmp=AE-BLIL-BL

[8] 401(k) participants: http://blog.aarp.org/2014/03/06/is-your-employer-shortchanging-your-401k/?intcmp=AE-BLIL-BL

[9] Morningstar: https://corporate.morningstar.com/us/documents/ResearchPapers/2013TargetDate.pdf

[10] >> Get discounts on financial services with your AARP Member Advantages.: http://www.aarpfinancial.com/content/aarpfinancial/home.html?intcmp=AE-BL-MON-DISC

[11] n-trash/iStock: http://www.istockphoto.com/stock-illustration-33859900-business-graphs.php?st=cd83b8f

[12] Why I Like 529 College Savings Plans: http://blog.aarp.org/2014/03/27/why-i-like-529-college-savings-plans/?intcmp=AE-ENDART1-BL-REL

[13] Portland, Oregon and 9 Other Budget-Friendly Trips for 2014: http://travel.aarp.org/articles-tips/articles/info-02-2013/affordable-vacation-ideas-2013.html?intcmp=AE-ENDART2-BL-BOS

[14] Get free assistance with tax-return preparation from Tax-Aide: http://www.aarp.org/money/taxes/aarp_taxaide/?intcmp=AE-ENDART3-BL-ADV

[15] Join AARP: https://appsec.aarp.org/MSS/join/application?keycode=U9ZTPH9&intcmp=AE-ENDART3-BL-MEM

[16] AARP home page: http://www.aarp.org/?intcmp=AE-ENDART3-BL-HP

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