At the end of 2007, so-called target-date funds held about $70 billion in assets. Now, their total assets top $400 billion, mainly held in IRAs and employer-sponsored plans. Along with this growth, investor misconceptions have soared. According to a recent SEC study:
[] Many investors believe that the target date is the point at which the fund is at its most conservative. They think the fund’s allocation stops changing at the target date.
That’s not the case. A fund with a target date of 2030, for example, might be heavily invested in stocks now. Over the next 18 years, it will gradually drop stocks and add bonds. Typically, the fund’s asset allocation will keep changing, shifting more assets into bonds until 2040 or 2045 or even later.
[] Only 36% of the investors surveyed knew that a target-date fund does not provide guaranteed income in retirement. The other investors either thought that some target-date funds did guarantee retirement income or didn’t know the answer.
In truth, a target-date fund is a mix of stock funds and bond funds. Over the years, the mix will change from aggressive to conservative. Investors can arrange for systematic withdrawals but neither the amount nor the longevity of those withdrawals is guaranteed.
If you are interested in a target-date fund, shop carefully. There are many such funds available, and their investment strategies may vary significantly, from one fund to another. Know what you’re buying and make sure you’re comfortable with a fund’s strategy.
