Target date funds, also known as lifecycle funds, move money from riskier investments like stocks to more conservative alternatives like bonds as an investor approaches retirement. Last year 7.3 million Americans held target date-funds, according to The Employee Benefit Research Institute's database of 24 million 401k participants.
Investors in some target-date lifestyle funds, supposedly targeted to be more conservative as one approaches retirement, are unaware that fund managers are chasing performance at exactly the wrong time.
The main reason that these funds are chasing riskier yield is because many charge a sales fee of up to 5%. It is extremely difficult to make that 5% back without taking on more risk then should be necessary for someone entering into retirement.
American Funds 2010 Target Date Retirement Fund
Lost -27.5% in 2008, and the fund sports a 5.75% maximum sales charge. Both the -27.5% portfolio loss and the sales charge is unheard of for someone entering into retirement.
These funds are doing one thing, making big commissions for the sales staff offering the plans. Target date funds may present greater risks then consumers have been aware of, says Morningstar's mutual-fund research group. An investor receiving a semi-annual report from Fidelity's Freedom 2010 Fund, for example would need to read through to page 20 to find the allocation in it's high yield fixed-income funds. The report does not break down the percentages of bonds rated below investment grade.
Investors in some target-date lifestyle funds, supposedly targeted to be more conservative as one approaches retirement, are unaware that fund managers are chasing performance at exactly the wrong time.
The main reason that these funds are chasing riskier yield is because many charge a sales fee of up to 5%. It is extremely difficult to make that 5% back without taking on more risk then should be necessary for someone entering into retirement.
American Funds 2010 Target Date Retirement Fund
Lost -27.5% in 2008, and the fund sports a 5.75% maximum sales charge. Both the -27.5% portfolio loss and the sales charge is unheard of for someone entering into retirement.
These funds are doing one thing, making big commissions for the sales staff offering the plans. Target date funds may present greater risks then consumers have been aware of, says Morningstar's mutual-fund research group. An investor receiving a semi-annual report from Fidelity's Freedom 2010 Fund, for example would need to read through to page 20 to find the allocation in it's high yield fixed-income funds. The report does not break down the percentages of bonds rated below investment grade.
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