Target Date Funds And Investment Risk

Target-date funds have not had a good couple of years

. These portfolios (made up of stocks and bonds) were established to allow 401K participants to save up for retirement, although expected benefits from participants may be in trouble. Market conditions have caused some funds with a 2010 target date to drop by about 40%. The response? Clamor from investors resulted in Congressional hearings, that in turn forced fund providers and managers to modify the structure of these investments.

Today, the situation for these funds and their investors have somewhat improved, but not by much. Most of the current target-date funds offered veered towards more conservative assets, and others supplemented by assets akin to hedge funds. You may find it hard to define such a fund today, as most fund managers are still at odds on the best way to distribute the assets of a target-fund portfolio. This turns the selection of the most appropriate fund difficult for a senior investor, despite the relative ease at which you can invest in it. For one thing, your 401K investments may not be sound, virtually requiring that you re-examine the fund you have bought into and figure out how to cope with any problems.

Risk Level

Any type of fund such as these is unique: no two funds with the same maturation date have the same investment strategy. For example, a John Hancock and Harbor Target Retirement with the same 2020 target date have entirely different stock allocations: the first has its stocks at 70%, while the second at a comparatively small 37%. On another note, if you are only a decade or so away from retirement, some experts peg that having 60% of your fund in stocks is still conservative, go figure.

You can further check out the assets your fund holds with the stock-and-bond allocation shown in the prospectus of your target-date fund, as well as from a number of reliable financial websites. You can also cross-reference these with the figures that show asset allocation for retirees today to find out the drop in investment risk.

A fund that is much too conservative or aggressive for your risk appetite can still be fixed. There are a couple of ways to do so: moving the target date forward or backward, and adjusting the asset mix. For a portfolio that has less stock, you can choose to change the date and make it half a decade before you plan to retire, while you can move it to a later date for more stocks. For modifying the asset mix of your target-date funds, you can put in another bond or stock fund, such as an index fund that tightly monitors the asset class.

by: Katherine Smith

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