This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Cramer on Retirement: The Trouble With Target Funds

(Editor's note: This is the third in a series of columns on retirement by Jim Cramer, founder of TheStreet , and Wally Konrad, former senior editor for Smart Money magazine. To read the first installment, click here. The second article is here.)

NEW YORK ( TheStreet) -- It was supposed to be so easy.

Target-date funds were designed as the buy-and-forget investment, especially for retirement accounts.

Investors choose a fund with the target date of the year they will turn 65 or expect to retire.

A 43-year-old worker, for example, would buy shares in a fund with a target date near 2040. A 55-year-old would buy a 2022 fund. You get the idea.

As the target date comes closer, the fund automatically shifts from more aggressive to more conservative investments.

The promise of automatic asset allocation and diversification has prompted plan sponsors and participants to swarm to target funds (and their precursors, known as life-cycle funds).

Assets in target-date funds have jumped from $71 billion at the end of 2005 to nearly $378 billion at year-end 2011, according to Morningstar.

> > Bull or Bear? Vote in Our Poll

What's more, 72% of companies offer target funds as the default investment for workers who don't specify where they want their money to go, according to a recent survey from Towers Watson.

To be fair, target funds are probably better than defaulting to a money market fund or throwing darts to pick your 401(k) options -- something plenty of 401(k) participants do, unfortunately. But like any heavily hyped investment, these things are flawed. Extremely flawed. Let me count the ways...

Performance. Target funds weren't immune to the market chaos starting in 2008. The average 2010 target fund, for instance, lost 22% in 2008 while the average target-date funds for 2036 through 2040 lost 39%, according to Morningstar. The next two years brought healthy bounce-backs for the average target date fund in every time frame, but in 2011 the group underperformed again, with almost all funds showing losses.

Actively managed target funds are particularly susceptible to poor performance, says David O'Meara, a senior investment consultant with Towers Watson. (More than 50% of target fund assets are in actively managed funds.)

There's a simple reason why they don't do well.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $118.03 0.00%
FB $105.79 0.36%
GOOG $750.26 0.28%
TSLA $233.40 1.60%
YHOO $32.94 -0.66%


Chart of I:DJI
DOW 17,798.49 -14.90 -0.08%
S&P 500 2,090.11 +1.24 0.06%
NASDAQ 5,127.5250 +11.3820 0.22%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs