'No-brainer' target funds require thinking

The Baltimore Sun

When it comes to retirement saving, is easier better?

Investors are pouring money into target-date retirement funds, which key their asset allocation off a particular retirement date. In 2006, about $114 billion was invested in those funds, according to the Investment Company Institute, a 60 percent increase from the year before.

Workplace retirement plans and individual investors are flocking to the funds because of their simplicity. Typically, they invest in underlying stock and bond mutual funds that are allocated to correspond with an investor's age.

So a 2030 fund, for example, might contain a majority of stocks that would be appropriate for an investor in her 40s. But the investments automatically grow more conservative as she nears retirement age.

Sounds easy enough. That simplicity, however, is also the downside of the strategy, some experts say.

"Target-date funds are not for everyone,"' said Ellen Rinaldi, a principal in Vanguard Group's investment counseling and research group.

People retiring about 2030 have different life expectancies, risk tolerances, spending needs and outside investments. Complicating matters more is the proliferation of target-date funds by various investment firms that have different asset allocations and benchmarks.

The confusion prompted Vanguard to publish a report last month calling for better benchmarking data that would help investors choose the target fund that best suits their needs.

New benchmarks would tell investors how a target fund performed relative to the portfolio manager's expectations and would track whether performance will generate a desired income level in retirement, Rinaldi said.

Fixed-income giant Pacific Investment Management Co., known as Pimco, issued a paper urging target funds to use a more conservative asset-allocation approach that more closely resembles traditional pension investing.

Several big target funds have shifted to more aggressive and higher-risk portfolios in recent years.

Because fewer retirees have guaranteed pension income, they need to lock in at least a portion of their nest eggs to a pool of real assets that go up when inflation does, said Seth Ruthen, an executive vice president for Pimco.

He advocates greater use of Treasury inflation-protected securities, or TIPS, in target-date portfolios.

So what are investors to do if they love the simplicity of target funds but are concerned about the debate over what is in them and how they will perform?

First, find out what is in your target-date fund.

"Like everything else, good stewardship pays off," even when it comes to investments classified as no-brainers, said Elaine Bedel, an Indianapolis financial planner. "You still need to know what's inside."

For retail funds, www.morningstar.com lets you view asset allocation and expenses, for free. If you have access to a target fund through your retirement plan, compare the investments, performance history and expenses to retail funds from large providers such as Vanguard and T. Rowe Price.

Both of those firms keep total expenses to below 1 percentage point of assets per year. The actively managed Price fund for 2015 has 68 percent of assets invested in stocks, while Vanguard's index-fund lineup has 63 percent in stocks.

Spicing up a target fund is fine for informed investors who know what they are doing, but too much tinkering dilutes the case for the target fund in the first place, Bedel said.

Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611.

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