Target: Act Three
Chatzky, Jean, Newsweek
Byline: Jean Chatzky
Here's everything you need to know about target-date funds so you won't be headed for the homeless shelter.
Twenty years ago, no one had even heard of a target-date retirement fund. By 2020, less than 10 years from now, they'll make up half of the $7.7 trillion in 401(k) and other defined-contribution retirement plans, according to consulting firm Casey, Quirk & Associates.
For the uninitiated, target-date funds (TDFs) are marketed as a set-it-and-forget-it retirement solution. You put your money into a fund with a date in its name that's in line with the year you think you'll retire. Over time these funds reduce their overall risk by dialing down their stock holdings and increasing their fixed-income ones. Result: the closer the target date, the more conservative the portfolio becomes.
These funds have always had a lot going for them. They save investors the hassle of picking individual funds, as well as the pain of rebalancing. Unfortunately, the perception going into the crash of 2008 was that they would prevent you from losing money as you closed in on your retirement date. That they did not do.
When the average 2010 TDF lost 24 percent in 2008, investors went screaming to their benefits departments and to the press. A Senate investigation and government hearings followed. Charles Schwab, Fidelity, and a number of other fund companies tweaked their portfolios to lower expenses (always a good thing); many reduced their equity exposure as well, says Craig Copeland of the Employee Benefit Research Institute. …