Some years ago the mutual fund industry set out to solve a problem; many investors had no idea how to invest their retirement funds. Initially these funds were designed to make the investment process easy for confused investors with too many choices inside their 401k plans. They are set up as a fund of funds type of mutual fund with equities and fixed income funds. The idea was for the funds to automatically shift their assets toward the more conservative side as retirement neared. What most investors did not understand, these funds still have a hefty exposure to equities at the target date. Some funds are as high as 60% at the target date. It was designed to be a set it and forget it fund. The investor picked the date they were set to retire and everything was supposed to work itself out. Then reality set in. According to Morningstar the average target date fund lost 22.5% in 2008. Below is the graph for a 2010 target date fund.
How would you like to have owned this fund in 2008 knowing you would be retiring in 2010? Most of these novice investors would have gotten scared and gone to cash. They would have missed the recovery. As you can see, these investments are not automatic. They may have taken too much risk for their investors as they closed in on retirement. These funds may be appropriate for some investors, but the investors need to understand how the funds work. How do they shift assets? What will be the percentage of equities at the target date? What assets are included? Do they hold assets other than stocks and bonds?
The truth is you cannot take your retirement for granted. Take it upon yourself to research your choices and make smart decisions. Most 401k plans now offer advice and help with setting your allocation. Also understand that with all investing comes risk. There will be swings in the market. Understand your goals and the amount of risk you need to take to reach those goals.
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