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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Target-date funds base their asset allocations around a specific date, typically an investor's expected retirement year. Fund families such as T. Rowe Price, Vanguard, and Seligman offer five or more target-date portfolios, ranging from 2010 to 2055. Fund managers gradually lower a port­folio's risk profile as the end date approaches. "Our focus is always on maintaining the appropriate asset mix between equity styles and bond maturities, given the investor's time horizon," says Mr. Kadlec. The target fund for an investor who is 25 years away from retirement may well have an 80 percent concentration in stocks. For those already in retirement, generally no more than a 40 to 50 percent stake in equities is considered advisable.

The typical target-date fund holds four groups of asset types: large-cap, small-cap, international, and bonds. These are generally managed within a "fund of funds" structure, using different fund offerings within the same family. Lately, however, a growing number of fund companies have begun to offer more alternative choices in their retirement funds including hedged products, commodities, real estate, and exchange traded funds (ETFs).

Seligman's core target mutual fund invests in eight ETFs that track specific securities indexes including large-cap stocks, mid-cap stocks, and Real Estate Investment Trusts (REITs). Designed for investors on the verge of retiring, some 35 percent of the core fund is devoted to fixed-income holdings.

Some caveats: The funds are best viewed as core holdings, not as parts of a stock portfolio that is already well diversified. Investors should compare offerings from several fund families over a three-year time frame. Funds with similar target dates can vary significantly in asset-allocation formulas. Some might be too conservative to reach an investor's long-term investment goals. Keep an eye on expense ratios, which tend to be higher than the average stock fund.

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