Buy Into Them, and Forget Them

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By Tim Paradis
Associated Press
Sunday, January 21, 2007

Many investors pride themselves on making regular contributions to their retirement savings plans, but once they set up those accounts, they're likely to spend more time weighing what movie to see or where to go on vacation than managing their assets.

While some might reject the notion of such neglect, many investors avoid financial checkups because they feel overwhelmed or find the process mind-numbing. For these procrastinators, target-date funds are a growing breed of mutual fund that promises the reward of a home-cooked meal with the ease of a TV dinner.

Target-date funds, which are referred to by a variety of names, including target maturity date funds, are becoming more popular because they allow investors to put money into a fund and get back to planning that vacation almost without a second thought. The funds gradually shift investments to become more conservative as their maturity dates near.

"Theoretically, you could set the clock and forget about it," said Tom Roseen, an analyst with Lipper, which tracks funds.

Granted, it's always wise for investors to keep tabs on their investments and, even among the lowest-maintenance funds such as these, not all are alike. But their appeal is clear.

In 2006, there were 210 such funds introduced, up from 178 in 2005 and 126 in 2004, according to Lipper. And there is big money in some of these funds: Vanguard, for example, has 11 target retirement funds, whose assets totaled $16.5 billion at the end of 2006. Most target date funds are no more than three years old.

"The main thing about all of the target-date funds is that they're simple. They all package some sophisticated asset allocation into a nice, easy-to-use package," said Bob Boyda, senior vice president at John Hancock Financial Services, describing such funds as "autopilot for life."

Most target date funds are what are known as a fund of funds -- those that invest in other mutual funds to boost diversity beyond what would generally be capable from a single fund. To get started, investors simply pick a year in which they expect to retire and then watch over time as the funds move toward more conservative investments, for example, by shifting from stocks to bonds.

One major difference among target-date funds involves how the funds' investments are weighted on the target date. Some investors expect, essentially, to be handed a check for the amount of their dutifully invested retirement savings. Other funds are run with the assumption that someone about to retire will still need some holdings in stocks, for example, and would run out of money if he's only invested in bonds, whose returns tend to be lower. It is important to understand a fund's philosophy.

This month, John Hancock Funds entered the target-date arena with the launch of nine funds. The funds are unusual in that once the target date has passed, the money is shifted into a retirement portfolio. The portfolio is essentially half stocks, half bonds, but with investments that are designed to add diversity and minimize the chance that investors would end up searching under couch cushions for change as their retirement continued. The fund assumes an investor's retirement will last 30 years.

Greg Carlson, an analyst at fund-tracker Morningstar, said that target-date funds vary in how conservatively they might be invested all along. Investors should be aware of how much of a fund is put into stocks and how much is funneled into bonds. He said the investments themselves should be broadly diversified and the funds should have low expense ratios.

"Costs are very important because they're meant to be held for a very long time," he said of target-date funds.

He believes 1 percent is a good benchmark. Expenses beyond that are likely to eat too much into returns, he said.

Target-date funds can also help save investors from themselves, observers say.

"It takes a lot of the emotion out of it. In volatile return cycles, investors will sell low and buy high," said Ellen Rinaldi, principal, investment counseling and research at Vanguard. "It keeps you from making those knee-jerk reactions when the market doesn't behave the way you want it to.

"It's not for everybody. These kinds of funds are for people who want to make the fewest decisions with the least amount of engagement," she said. "It's a simple approach, but it's not unsophisticated," she said.

Even those investors seeking as little exertion as possible should review their investments at least once a year -- perhaps during that well-planned vacation -- to ensure they are still on the wisest course for reaching their retirement goals.

"Start contributing, get appropriate asset allocation and save as much as you can," Rinaldi recommends.


© 2007 The Washington Post Company

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