Those no-brainer target-date retirement funds are on a tear.
These funds are proving popular because investors (and employers) like their single-decision promise. Buy a fund named after the year in which you expect to retire, such as the Schwab Target 2010 or the Fidelity Freedom 2050, and the fund does the rest. It moves money from stocks into bonds on a "glide" path that is supposed to grow your retirement savings while protecting your assets for your whole life.
Some 42 percent of workers now hold these funds in their 401(k) accounts, reported Vanguard. And assets in the funds have rocketed 271 percent from $69 billion in 2005 to $256 billion in 2009, according to the Morningstar study.
That's ironic, because these funds also were the subject of widespread criticism when many of them lost buckets of money in the 2008-2009 market meltdown. "It seems the more we learn [about target date funds], the more concerns we have," fund critic Sen. Herb Kohl (D-Wisconsin), chair of the Senate Special Committee on Aging, said as recently as October.
He's argued that the funds are problematic because (1) they have a wide disparity of glide paths and some are downright aggressive; (2) investors don't really know what they are getting; (3) some of them self-deal by filling their funds with other costly funds from their own company; and (4) some of them are too expensive.
Those criticisms are important, because employers are allowed to automatically enroll their workers in target-date funds. It's bad enough when you choose your own mistakes; worse when your boss does it for you.
But that doesn't mean you should flee target date funds. They are improving. Some funds have recently cut their costs and adjusted their glide paths. Both the Department of Labor and the Securities and Exchange Commission are preparing new rules that should help. Most have recovered their jarring 2008 losses, and the best of the crop offer a lot of management for minimal costs.
Bottom line? A good target date fund offers decent returns, low costs, and a glide path that fits with your own risk tolerance. If you are attracted by their one-decision appeal, just make sure you're making that one decision carefully. Choose a good one.
Photo by Hans S at Flickr