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4 Questions to Ask Before Investing in a Target-Date Fund for Retirement

These set-it-and-forget it funds and similar 401(k) options can make investing simple, but you need to know how to size them up

By Ann C. Logue

What's the fund’s glide path? A target-date fund’s “glide path” is the way the fund manager will change the mix of assets as its target date looms closer. For instance, a fund managed for a target 40 years into the future might start out mostly in stocks, then shift more heavily into conservative bonds as 2052 nears to help avoid the chance of a loss when investors need the money. Some target-date fund managers take more risk in the stock market early on, while others take more risk in later years. What’s right for you depends on your comfort level.

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Does my 401(k) offer a balanced fund that's rated higher than the target-date fund? Morningstar's Charlson says that while target-date funds may be a good idea for many investors, not all target-date funds are good ones. If you are looking for a target-date fund on your own, not for your 401(k), compare funds from different companies for their performance, fees and glide paths. If your 401(k) plan has only one target-date option, Charlson suggests going to morningstar.com and comparing the Morningstar rating for the target-date mutual fund from the same investment firm and a balanced fund from the investment firm offering a balanced fund in your 401(k). (A balanced fund is a mutual fund that holds stocks and bonds.) If the balanced fund is rated higher than the target-date fund, it may make sense to stick with a balanced fund in your 401(k) and skip the target-date option.

Ann C. Logue is the author of books including Emerging Markets for Dummies and has written for Next Avenue, Barron's and Entrepreneur. Read More
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