NEW YORK (TheStreet) -- When it comes to saving for retirement, many people really want to be able to just "set it and forget it," which is why target-date funds are rapidly becoming a favorite choice for American investors.
"Within our 401(k), almost 74% of participants are using them, they're the most popular option," says Jerome Clark, portfolio manager of the T. Rowe Price Retirement Funds. "They take all the different things that have been challenging for investors to do ... out of their hands and put [them] into the hands of an investment professional."
But even an investment tool especially designed to fit your timeline has its issues. A big one is when you don't use the tool correctly.
"The beauty of target dates is that they're an asset-allocation product," says Clark, so they're doing the diversification for you. A single fund exposes you to the broader markets in a balanced way. "We really recommend that target dates be a foundation, if not the only investment option [you use], because they're so diversified, making sure that they're minimizing that overlap." If a retail investor attempts to diversify outside of such a fund, he risks inadvertently upsetting the carefully designed asset-allocation plan he was after in the first place.
T. Rowe Price, notes Clark, takes an unusual approach to the target-date question: It offers two different categories for each set of dates. The aggressive group of funds holds higher proportions of equities. It's meant for investors who are planning for long retirements and are willing to take more risks to pay for them. The other, more conservative, category holds safer securities, and is meant for folks looking for consistency and principal protection rather growth later in life.
If you're a hands-off investor, target date products are a great product for you, he said, but if you prefer to be an involved, hands-on investor, you can use target date fund as a foundation for your portfolio.