Target-Date Funds Take Time and Attention, Too

Bracing for their year-end 401(k) statements, many investors who put money in 2010 target-date mutual funds may be facing a delayed retirement.

Target-date funds have recently become popular as a default option for 401(k) plans, in part because investors can take a hands-off approach. The funds automatically adjust to a more conservative asset mix approaching retirement, usually close to the fund's target date.

Well, soon-to-be-retirees who expected to emerge largely unscathed from 2008's market plunge weren't always so lucky.

Last year's average loss was nearly 25 percent among 31 funds with 2010 retirement target dates tracked by Morningstar. That's not that much better than the 33.8 percent hit the Dow Jones industrial average suffered in 2008 or the nearly 39 percent drubbing for the Standard & Poor's 500-stock index.

And target-date funds, also known as life-cycle funds, are hardly created equal. Their strategies vary widely, which explains last year's vastly different performances among funds with identical target dates, 2010 and otherwise. For instance, depending on which 2010 fund investors were in, the 2008 loss may have been as small as 3.6 percent or as big as 41 percent.

Investors in target-date funds weighted more heavily toward stocks than less-volatile bonds must ask if they've got the stomach to stick it out after being burned last year. And they need to be aware that target-date funds are complex and merit scrutiny, even though they can appear on paper to be the investing equivalent of autopilot.

"The key part for target-date investors is understanding the allocations of the funds -- as you would for any other mutual fund -- and not closing your eyes," said Lynette DeWitt of fund industry tracker Financial Research Corp.

Last year's top performer on Morningstar's list of 2010 funds -- the one that lost 3.6 percent -- was DWS Target 2010 (KRFAX), which invested heavily in safe assets such as Treasury bonds.

At the other end, Oppenheimer Transition 2010 (OTTAX) posted the 41 percent loss. It has a portfolio heavy on stocks (65 percent) and is more prone to short-term volatility, but it could be a better long-term bet for many retirees as life expectancies lengthen.

Like most target-date products, Oppenheimer Transition 2010 is a fund of funds, meaning it allocates investor money across other Oppenheimer funds. Managers gradually shift to more conservative funds and asset categories as retirement approaches.

Oppenheimer Transition 2010 was dragged down by one of its underlying funds last year. About two-thirds of its 30 percent bond component was in Oppenheimer Core Bond (OPIGX), a fund that slid nearly 36 percent because of risky investments in mortgage-backed securities.

Spokeswoman Jeaneen Pisarra said Oppenheimer's target-date funds "offer capital income and appreciation up to and through retirement years. Like all products we offer, these funds are designed to be long-term investments. One-year results are not a true assessment of long-term performance."

Despite target-date funds' difficult 2008, the relatively new products continue drawing new investors because of their automatic portfolio-adjustment features and their replacement of money-market funds as default options in many 401(k) plans.

Fidelity Investments, T. Rowe Price and Vanguard Group, respectively, were the top three among 43 target-fund providers as of last September, managing more than three-quarters of all target-date assets, Financial Research found.

Even if they are more complex than at first glance, target-date funds can be a good choice, particularly for hands-off investors. A Vanguard study found that target-date funds helped moderate asset-allocation extremes. Thirty percent of participants who didn't invest in target-date funds had risky, all-equity portfolios, with 16 percent holding ultra-conservative zero-equity portfolios. Stock exposure of target-date-fund investors generally ranged from 40 percent to 90 percent.