Articles

Benchmarking A Moving Target
By George Daniels, James Lauder

Related ETFs: DON

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As baby boomers approach retirement age and as individuals of all ages re-examine their 401 (k) choices, k the popularity of "target date" mutual funds is soaring.

These funds aim to offer one-stop shopping for individual investors, featuring portfolios (usually funds of funds) that are specifically designed to reduce risk as the "target date" nears when the investment capital will be used for a particular purpose (retirement, college education, etc.).
Illustration by Art Glazer

According to a recent comprehensive fund industry report published by Lipper (March 14, 2005), assets in target date retirement funds jumped 65 percent in 2004 to $43.9 billion, while the number of funds rose from 60 to 78.

Why the growth?
Tom Lauricella explains it this way in his recent article "Shopping at 'Target,' Mutual Fund Style for Retirement," which appeared in the January 7, 2005, edition of The Wall Street Journal:
Simplicity isn't a word that most people associate with investing. That goes a long way toward explaining the rising popularity of mutual funds designed to provide one-stop shopping for retirement investing. The funds, known as "target date" or "lifecycle" funds, simply require investors to pick one that comes closest to their expected retirement date and let professional money managers do the rest.

Jane Bryant Quinn, in her Newsweek article, "One Fund Is All You Need" (February 28, 2005), sums it up this way:
Too bad we got what we wanted, when we started investing our own retirement funds. We wanted choice-lots of different mutual funds. We imagined dividing our money among the best-so much in stocks, so much in bonds (if we paid any attention to bonds). For fun, we'd pick the stocks that went up, or our broker would. Ha. The world turned, and those on top suddenly slid off. We learned that we had no idea how to balance reward and risk. Some of us risked too much, and are still dangerously exposed. Others sit fearfully in bank accounts at 1.5 percent. We had plenty of choice and we muffed it. Now we want advice. One-stop funds cuddle up to a human truth: Most of us don't want to manage our retirement money. We're inexpert. We have other lives.

The number of plan sponsors offering target date investments has almost doubled since 2001. In addition, the simplicity and potential fiduciary soundness has led to an increasing number of defined contribution plan sponsors turning to target date investments as default options in their retirement plans.