CHICAGO (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 retirement date.
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: