From the April 2009 issue of Boomer Market Advisor • Subscribe!

Target-date-fund tweaks

Not that we're all that surprised (they are mutual funds after all), but target date funds are a major disappointment. After an "investing made easy" bull market pitch, the bear market hasn't been kind.

"In the wake of the market crash, target-date funds have fallen off their pedestal," writes Janet Paskin in the Wall Street Journal.

"These retirement funds suffered big losses in 2008, even in what were supposed to be the most conservative options; so did many college savings plans that use a target-date approach. Now Morningstar, the fund-research firm, has fine-tuned its ratings system, making it harder for poor performers to hide, and college savings plans also are backing away from the target-date approach."

According to Paskin, the Morningstar changes look subtle at first. The company groups mutual funds into categories, and then ranks them. Until this month, it used three categories for target-date funds, lumping together portfolios with dates from 2000-2014, 2015-2029, and 2030 and beyond. Now Morningstar is using five-year bands, so funds with a target-date of 2025 will be judged only against other funds with a similar objective. Morningstar analyst Greg Carlson says the narrower categories make for better performance comparisons.

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