Posted By: CFP&WM On: Dec 14th, 2009 In: Estate planning Financial planning Investing Retirement planning

Consider Target Date Retirement Funds Carefully

In the last several years, numerous mutual fund companies have developed Target Date Retirement Funds (TDR) that are based on when people plan to retire. The longer away the retirement date, the more aggressive the allocation (more stocks) and it gets more conservative (more cash and bonds) as the retirement date nears.

The idea is that with one fund you get exposure to domestic and international stocks as well as corporate and government bonds and the allocation automatically adjusts over time.

These companies realize investors often do not pay attention to their asset allocation of their investments. People tend to put money into mutual funds but do not monitor them over time.

These funds are designed to fix that but there are some issues that you should be aware of if you are considering this type of an investment:

1. The proper mix of asset types within your portfolio should be based upon your tolerance for risk (your mental ability to deal with volatility), your capacity for risk (your financial situation) as well as your goals including your time frame. The problem with these retirement date funds is they look only at a point in time to determine the allocation and totally disregard your risk tolerance and capacity. The result could be an allocation that is not appropriate to your situation, which could be greater volatility or under performance of your investment.

2. Each investment company has a different philosophy as to the allocation for a given retirement date. How is a person to know which of the 100’s of funds is best suited to their situation? Note the difference in allocation amongst these funds:

Fund Name

Stock %

Fixed income %

Fidelity adviser freedom 2015 A

53%

47%

J.P. Morgan Smart retirement 2015 A

52%

48%

T. Rowe Price retirement 2015

65%

35%

Vanguard target retirement 2015

61%

39%

Schwab retirement 2015

55%

45%

Putnam retirement ready 2015 A

42%

62%

There can be as much as a 50% difference, which has a huge impact on risk and expected return.

3. The target date funds often do not provide great enough diversification across different asset classes. Value style funds, small-cap funds, emerging market and REITs are usually underrepresented. This lack of diversification may increase volatility and provide smaller returns than a more properly allocated portfolio.

4. A recent study has revealed there are many misconceptions amongst those who have invested in these funds.

a. 40% think that the fund has a guaranteed return- NOT TRUE

b. 40% think they get higher returns than the stock market in general- NOT TRUE

c. 60% think that they will be able to afford to retire on that date of the fund-NOT TRUE.

5. The fees associated with these accounts vary dramatically and are a huge revenue stream for some companies. The commissions and operating expenses can be a drag on performance. People may be better served with those funds with no commission and lower operating expenses.

Fund Name

Commission %

Gross expense Ratio

Fidelity adviser freedom 2015 A

5.75%

0.93%

J.P. Morgan Smart retirement 2015 A

4.5%

1.35%

T. Rowe Price retirement 2015

0

0.65%

Vanguard target retirement 2015

0

0.18%

Schwab retirement 2015

0

2.35%

Putnam retirement ready 2015 A

5.75%

1.1%

If you are invested in these types of funds or are considering them, you should find out their allocation and determine if the mix of asset classes in the fund is really suited to you and to be sure that your fund has low fees to help increase your return.

Michael Chamberlain CFP®
Ca Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340

This article is for informational purposes and should not be taken as legal, tax or investment advice.

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