The research firm Siegel & Gale conducted a study for the Securities and Exchange Commission, interviewing 1,000 Americans about target-date funds, which now have more than $370 billion in assets — more than 10 times the amount they had 10 years ago. Here are the scary findings:
- Most respondents (51 percent) thought all target-date funds provided guaranteed income in retirement or that some did; an additional 20 percent weren’t sure. The reality: No target-date funds provide guaranteed income.
- Only 30 percent understood the correct meaning of the year in a target-date fund’s name. It’s actually the year when an investor will retire or stop buying shares in the fund. But most respondents thought it was something else entirely — the year the fund invests most conservatively, the year when the investor will withdraw all his money, the year when he’ll get the fund’s “guaranteed” income or the first year he’ll be able to withdraw money.
- A 54 percent majority didn’t know whether all target-date funds in their names with the same year will have the same mix of stocks and bonds at that date. About a fifth of respondents thought that if one 2020 target fund held 40 percent in stocks and 60 percent in bonds in 2020, then all 2020 funds would. The reality: Each fund manager can decide how to invest, so every 2020 fund is different.
- Most didn’t understand whether the manager could change the mix of stocks and bonds after the fund’s target date. The reality: It depends on the fund.
Target-date funds aren’t necessarily bad choices for your retirement money. “If you don’t have the knowledge, time or desire to actively choose and monitor your investments, they can be a very smart way to go,” says Josh Charlson, senior mutual fund analyst for Morningstar, the investment research firm.
But you need to understand what you’re investing in and pay proper attention to it. Based on the Siegel & Gale survey, it seems likely that many people whose employers plopped them into target-date 401(k)s don’t understand how their investments work.
Advice for Investing in Them
Before investing in a target-date fund or 401(k), be sure to look at what percentage of its assets will be invested in stocks in the target year, and decide whether you’re comfortable with that amount. The variation among similar-sounding funds is enormous. When Morningstar looked at three dozen funds with a target date of 2025, the percentage of fund assets in stocks ranged from 38 to 86 percent, according to The New York Times.
Protecting Target-Date Fund Investors
The SEC and the Department of Labor (which regulates employer-sponsored retirement plans) dropped the ball on protecting target-date fund investors.
Next Avenue Editors Also Recommend:
- 4 Questions to Ask Before Investing in a Target-Date Fund for Retirement
- Why Stocks Look Safer Than Bonds Right Now
- Can Boomer Women Ever Afford to Retire?
- Create a Sound Investment Mix for Retirement Income
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