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

Do Target-Date Retirement Funds Miss the Mark?

NEW YORK ( TheStreet ) -- Holding more than $500 billion in assets, target-date funds rank among the most popular choices in retirement plans. The funds are designed to serve people who will retire on certain dates, such as 2020 or 2035.

But some financial planners argue that the target funds are not perfect solutions. Critics contend that the one-size-fits-all portfolios should be tweaked to lower risks or to boost returns. "The strategies of target-date funds do not make sense," says Ron Surz, president of Target Date Solutions, which seeks to lower risks of portfolios.

At a time when most observers praise the target-date funds, the critics remain a distinct minority. Still, their views are worth considering because they suggest ways that retirement portfolios could be improved or customized by do-it-yourself investors.

The target-date approach has attracted millions of investors by offering balanced portfolios of stocks and bonds. For 401(k) participants, the diversified funds represent a step forward from the days when many savers put all their money in cash or the stock of their employers. Much of the criticism focuses on the asset allocations.

Funds for people in their 20s and 30s typically have 70% to 90% of assets in equities and the rest in fixed income. As savers age, the equity allocations gradually decline according to schedules known as glide paths. Portfolios for retirees have from 20% to 50% in equities. The thinking is that older people must be more conservative because they have little time to recover from market downturns.

Critics charge that the glide paths should be changed. Surz says that the funds for older people are hazardous because the equity allocations are too big. He points to the losses that equity portfolios recorded in the financial crisis. During the downturn of 2008, funds with target dates of 2000 to 2010 declined an average of 22.5%, according to Morningstar. For retirees, such losses could be devastating.

To avoid being caught in a downturn, Surz says that investors should begin shifting to cash 10 years before the retirement date. At the time of retirement, the funds should be entirely in cash. That way savers won't suffer big losses just before withdrawals start.

1 of 2

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
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%
YHOO $44.52 0.00%


DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs