'Target-date' funds can be tailored to year of retirement
As employers scale back pension plans or get rid of them altogether, everyone from mechanics to bank tellers is increasingly responsible for managing their own retirement plans.
And it has been no easy task.
Now, future retirees are looking into what's known as target-date retirement funds, which do some of the work of planning a diversified portfolio of stocks and bonds for you. The funds, which also are known as lifecycle funds, adjust the mix of stocks and bonds in their portfolios to become less risky as the investor approaches retirement.
Employers increasingly are adding such funds to their lists of options in retirement accounts such as 401(k) plans, investment advisers say.
"This just made it easier for the employer to explain it to the employees," said Bryan Bell, First Tennessee's vice president and head of wealth management. "All you have to know now is when you want to retire."
The funds also take away the burden of adjusting one's portfolio over time.
For instance, a fund with the target date of 2020 might have 40 percent of its assets in high-grade government and corporate bonds. A 2040 fund for someone much younger might have 90 percent in stocks, which tend to be riskier but with better returns over the long haul.
Human resources consulting firm Hewitt Associates says three out of five 401(k) participants didn't adjust their investments at all during a recent five-year period.
Many people put all their assets in the retirement fund available with the highest return last year, investment advisers said. Because of the volatility of risky investments, the fund that did best last year may very well perform the worst this year.
Plans are well received
Louisiana-Pacific, the building-material company based in Nashville, Tenn., now offers target retirement funds. So do some smaller firms, such as Charles C. Parks Co. in Gallatin, a convenience store distributor with about 175 employees.
"The reception has been good," said Allen Hanks, the executive vice president and general manager of Charles C. Parks, which started offering the funds a few years ago. "It takes you out of the decision-making process, and it's professionally managed."
About 48 percent of employers offer target-date funds, according to last year's survey by Wells Fargo's employee benefit company, Bryan, Pendleton, Swats & McAllister. Gage Logan, Morgan Keegan & Co. branch manager and managing director, estimates the figure could be even higher.
But investors still should study the funds closely to see if they like them, advisers said.
Kevin Sullivan, a principal and senior consultant for Bryan, Pendleton, Swats & McAllister, said people should compare the fees associated with target funds. If one fund's fees are higher, investors should find out why, he said.
Investors also should make sure they feel comfortable with the current asset mix of the target retirement fund they choose. Some target-date funds just contain index funds and are relatively low cost. Other funds are more actively managed and may include more risky investments, such as real estate investment trusts.
"Not all target 2040 funds are the same," Sullivan said. "Even though it's an autopilot investment, (people) still need to do their due diligence."
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