Keep your eyes on your target-date fund
NEW YORK — Simple is good when it comes to investing for retirement. But even after you find something simple, you can't take it easy.
That's the case with target-date retirement mutual funds, which some advocates call “set-it-and-forget-it” investments. If you began putting money in a target-date fund five years ago and have since tuned out, it's undergone some transformation. The changes go beyond the gradual shift from stocks to bonds that all target-date funds are designed to undergo. They are more fundamental.
Target-date funds take care of how to divvy up a retirement account among stocks and bonds, allowing savers to put the decision-making on autopilot.
Savers pick a fund set for the year that they hope to retire: Early 30-somethings might pick a fund targeted at a retirement in 2045.
When retirement is far off, target-date funds invest heavily in stocks. That's because investors have the luxury of time to ride out dips that may occur. Each of the three biggest target-date fund providers — Fidelity, Vanguard and T. Rowe Price — keeps at least 85 percent of its 2045 fund in stocks.
As the years progress, target-date funds shift some of their money from stocks into bonds and cash because investors should take less risk as retirement approaches.
Here are some guidelines to keep in mind as you consider target-date funds, as well as some of the ways that they've changed in recent years:
• They're built to be the only fund you own for your retirement savings.
Some investors feel they need to own many different mutual funds to be diversified, says Jim Lauder, who helps run the Wells Fargo Advantage Dow Jones Target Date funds. They shouldn't if they own a target-date fund. Each holds hundreds of stocks and bonds from around the world, and managers have constructed them to be diversified.
• Two target-date funds for the same year can look very different.
Some providers are more aggressive, putting a heavier emphasis on stocks, while others are more conservative. The Wells Fargo Advantage Dow Jones 2020 fund (WFDTX) has 43 percent of its money in stocks, for example, while T. Rowe Price's Retirement 2020 fund (TRRBX) has 68 percent.
• They're becoming more foreign.
The average 2040 fund has 36 percent of its stock investments in foreign companies. That's up from 24 percent in 2005, according to Morningstar.
• They're becoming more passive.
Target-date funds are typically made up of other mutual funds. The majority of the industry's assets are invested in actively managed mutual funds. But a growing number of target-date funds are relying on index funds, which passively follow an index rather than try to beat it.
• They're getting cheaper to own.
Expenses are going down as a direct result of the increased focus on index funds. Target-date funds have an average expense ratio of 0.91 percent, which means that $910 of every $100,000 invested goes to pay for manager salaries and other fees each year. That's down from $1,040 in 2008.
• They don't magically solve the problem of saving for retirement.
Target-date funds manage how your savings are invested, but that's only part of building a nest egg. “No retirement income product is going to be successful if you haven't saved enough,” says Brett Wollam, senior vice president of Fidelity Investments Life Insurance. “Save more and save earlier.