All Target-Date Funds Aren't Created Equally

Regulators and investors have been lashing out at target-date funds.

At a recent hearing, Securities and Exchange Commission Chairman Mary Schapiro said investors had been surprised by big target-fund losses during the downturn of 2008. The damage was particularly painful because target-date funds had been billed as safe choices for retirement savers.

Some financial advisers have called for regulating the funds more closely or scrapping them altogether. But for the moment, millions of investors still have good reasons to use them. For starters, target funds are the best options available in many 401(k) plans. In addition, the funds offer a convenient way to obtain diversification.

Target funds are designed for investors who expect to retire around a certain date, such as 2010 or 2030. The idea is to provide a single investment that retirement savers can buy and hold for years.

A typical target portfolio keeps a diversified mix of stock and bond funds. As investors age and approach the retirement date, the portfolio allocation is automatically adjusted to be more conservative and hold increasing weightings of fixed income.

The funds aim to make investing simple. But as all the fuss suggests, shopping for a target-date fund is not easy. Before making any purchases, investors must weigh a blizzard of figures.

Data on returns can be especially misleading. Consider the returns of funds with maturity dates of 2015. At first glance, some funds appear superior to others. Near the top of the performance standings is SunAmerica 2015 ( HWFAX), which returned 3.2% annually during the three years ending in June, according to Morningstar. Lagging is T. Rowe Price 2015 ( TRRGX), which lost 3.3% during the period.

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