CHICAGO, May 8 (Reuters) – A torrent of money flowing into
target-date funds suggests many retirement investors may be
ignoring the risks of this key category.
These funds now represent the second-most-popular allocation
after U.S. large-stock funds within defined-contribution plans
like 401(k) accounts, according to pension consultant Callan
Associates. Target-date assets have climbed above $500 billion,
attracting $16 billion in the first two months of 2013 alone,
according to Strategic Insight.
Target-date funds combine several mutual funds within one
package and are managed so that they move to less risky postures
as their shareholders move closer to retirement. That movement -
usually from stocks to bonds – is called the fund’s “glide
path.” The funds take aim at specific future dates, and
investors are expected to buy the fund that matches their own
Investors may find themselves automatically invested in
these funds: Target-date funds are approved by the U.S.
Department of Labor as a default choice in 401(k)s, so some plan
managers use them whenever they automatically enroll employees.
All that might suggest the funds are fairly risk-free. But
while diversification strategies can reduce risk, they don’t
eliminate it. Some target-date funds are much more volatile than
others, depending upon their allocation. Their internal risks
are poorly understood, fund expenses are high and they yield
varying results. Here’s what investors may be missing: