One-stop shopping for retirement

Target-date funds simplify the process of building a retirement nest egg.

from the April 9, 2007 edition

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Want to take the emotional stress out of managing your fund portfolio and earn higher returns to boot?

Then take a close look at a "one size fits all" type of fund designed to simplify the process of building a retirement nest egg. That's the enticing message from purveyors of target-date mutual funds, a type of fund that is carving out a growing niche for itself in corporate and (to a lesser extent) individual retirement plans. Spurring recent growth is a 2006 pension law that lists target-date funds among the approved types that employers may promote as default investment options. Companies can automatically enroll new workers in a 401(k) plan and, if there's no objection, deposit a slice of workers' paychecks in a target-date fund.

Geared to investors at all stages of their lives, target-date funds share a common goal: helping to ensure a comfortable retirement. Their basic premise is that investors can build wealth faster over a decade or two if they follow a formal asset-allocation plan overseen by professionals and not swayed by short-term market fluctuations.

Target-date funds, says Charles Kadlec, managing director of J.&W. Seligman, "protect investors against reacting emotionally to the inevitable ups and downs of the market." Many studies show that few stock-fund investors achieve the kind of returns that funds they own actually produce over a longer term period. "People tend to get aboard hot funds when it's too late or dump laggard performers as they begin to turn around," he says. "Target-date funds keep you on a steadier course."

By cutting across many asset classes, these funds cater to investors who don't have the inclination or knowledge to develop a diversified retirement portfolio on their own. They relieve investors from having to rebalance the asset mix or decide what type of fund to buy. These offerings "have strong appeal for less-sophisticated folks," says Jeff Tjornehoj, senior analyst with Lipper, because of their one-stop diversification, modest cost, and disciplined risk-management strategies .

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