Target-Date Funds Riskier Than You Think

Target-Date Funds: Reliable or Risky?

To ensure that employees spread their bets, employers have begun offering target-date funds. These automatically maintain diversified portfolios of stocks and bonds. The funds are designed to serve savers who plan to retire near certain dates, such as 2020 or 2040.

As the saver nears retirement, a fund's allocation to bonds steadily increases. The idea is that older savers must be more cautious, since they have little time to recover from losses. The allocation changes automatically and requires no input from investors. In theory, an employee can sign up for the fund -- and forget about it for decades.

But employees who blindly buy a target-date fund could be in for surprises. According to a study by Financial Research Corporation, there are 58 providers of target-date funds, and their allocations are all over the map. While Wells Fargo Advantage 2020 Fund has 51% of assets in equities, Fidelity Freedom 2020 has 69% in equities, and Oppenheimer Transition has 90%.

Not only are there a bewildering range of choices, but some funds have been abruptly changing their allocations to equities. According to Financial Research Corporation, the average target-date fund had 68% of its assets in equities in 2007, up from 55% five years before.

Fund companies say that they are increasing stock holdings to provide growth for retirees. But analysts speculate that funds are raising equity allocations to outdo rivals in increasingly competitive markets.

"I am concerned that there is a race to become more aggressive," says Tom Idzorek, director of research for Ibbotson Associates, an investment advisory firm that tracks target-date funds.