Target date funds

A growing popular option for retirement plan investors is to use a target date fund as the investment medium. These funds are now being offered, often as default investment options, in corporate retirement plans and are offered by a growing number of mutual fund firms.

Target date funds
Target retirement funds are marketed for investors who want simplicity of managing their investments. These funds make assumptions about their potential investors; one of which is asset allocation, an important decision an investor has to make.

The Department of Labor recommends that investors consider the following factors when selecting a target date fund:
 * 1) Consider your investment style. Do you want to play an active role in managing your investments, or do you prefer the more hands-off approach of a target date fund? Keep in mind, however, that even with a target date fund, it is important to monitor the fund’s investments over time.
 * 2) Look at the fund’s prospectus to see where the fund will invest your money. Do you understand the strategy and risks of the fund, or of any underlying mutual funds held as investments?
 * 3) Understand how the investments will change over time. Are you comfortable with the fund’s investment mix over time? In particular, make sure you understand when the fund will reach its most conservative investment mix and whether that will occur at or after the target date. Does your level of risk tolerance match how aggressive or conservative it is?
 * 4) Take into account when you will access the money in the fund. How does the fund’s investment mix at the target date and thereafter fit with your plans for the future, whether they are to withdraw your money at retirement, or to continue to invest?
 * 5) Examine the fund’s fees. Do you understand the costs for both the target date fund and for any mutual funds in which the target date fund invests?

When choosing a fund, the Bogleheads recommendation is to ignore the fund's date. Instead, determine the amount of risk the investor is willing to tolerate and work backwards to find a fund that matches the chosen stock/bond allocation. The investor may be surprised to find a large discrepancy between the planned retirement date and the fund's target date. Remember that the fund does not know the individual investor.

Target retirement indexes

 * Dow Jones Target Date Indexes
 * Dow Jones Real Return Target Date Indexes
 * S&P Target Date Index Series
 * Morningstar

Articles

 * William Bernstein on Vanguard's Target Retirement funds: The One-Fund Holy Grail
 * Why the Target Funds are Good Marketing but Lousy Investing by Scott Burns.
 * A Better Mousetrap, Craig L. Israelsen, Financial Advisor Magazine (February 2008)
 * Missing the Target by Craig L. Israelsen and Joseph C. Nagengast, published in Financial Planning Magazine, September 2007.