When we get on a plane, we trust that the pilot is trained, rested, and savvy about the upcoming trip. We trust the plane and crew will get us to where we want to go, and in reasonably good shape.
It’s no different with “target date” mutual funds, which are designed to get investors to their target retirement date with their accounts intact. We trust that the fund managers know what they are doing and will get us to our destination date in reasonably good financial shape.
But income planning customers need to know more than that about these funds.
Namely they need to know, and to be reminded, that target-date funds are mutual funds, so retirement goals and performance are not guaranteed.
They should also know, and be reminded, that most such funds declare their objectives to include prudent money management and a gradual beefing up of conservative investments as time passes.
It may also help for them to know that these funds’ actual investment approaches vary considerably. That is the gist of 2 news reports, both reported out in May 2008, which appear in this month’s issue of Income Planning. Brief summaries follow:
In Watson Wyatt study says some target-date funds miss their target, we find that, in 2006, stock allocations in funds aimed at employees about 10 years from retirement varied from 40% to 80%, according to Watson Wyatt Worldwide, Washington. Also, allocations in target-date funds aimed at employees who were about to retire ranged from 20% to 65%, the consultants said.
In Target-date holdings vary, FRC finds, we learn that, among 58 funds designed for workers planning to retire in 2020, the amount of holdings invested in stock, stock funds and related instruments varies from 51% to 95%, according to Financial Research Corp., Boston.