- The Washington Times - Monday, March 1, 2004

There are two kinds of investors: do-it-yourselfers and the rest of us. And mutual fund companies know this.

Some investors happily immerse themselves in market data, charting each success like a proud gardener with a prize-winning tomato. But most of us would rather be doing other things; we’re too busy or too bewildered to deal with our finances.

With those anxieties in mind, some fund companies have launched targeted retirement funds — combinations of stocks and bonds that automatically rebalance over time. The idea is to provide simple, one-stop shopping for people who want to make all long-term investing decisions in a single step.

Traditionally, experts have advised investors to adjust their portfolios continually, making them more conservative as the years pass. Targeted funds do it for you, starting out more heavily invested in stocks, then gradually shifting toward bonds. All you have to do is pick the fund targeted to the year closest to your retirement date.

First conceived for 401(k) participants, targeted funds are gaining popularity among people rolling over their retirement accounts. Now, with new funds from T. Rowe Price Group and Vanguard Group, there are more choices.

Because these are “funds of funds,” meaning that they invest in other mutual funds within the same family, they are “only going to be as good as the fund shops that offer them,” said Kerry O’Boyle, an analyst with Morningstar Inc. So if you are considering a targeted fund, you probably will want to choose one from a well-established company with plenty of market experience.

Although most targeted funds are set up in similar ways, they can differ widely in terms of asset allocations.

For example, Fidelity Investment’s Freedom 2020 fund, theoretically aimed at a 50-year-old whose retirement is 16 years away, is about 65 percent invested in equities. Vanguard’s 2025 target fund has about 60 percent in stocks, and T. Rowe’s 2020 fund has about 75 percent.

T. Rowe’s targeted funds rely on equity appreciation far longer than similar funds. They have a hefty 55 percent equity stake at retirement, which is scaled back to about 20 percent over a 30-year period. With more than 20 percent of people living to age 90, it makes sense to use a longer time-horizon, said Jerome Clark, portfolio manager of T. Rowe’s retirement funds.

“One thing we do understand is most investors are not going to spend a lot of time on this,” Mr. Clark said. “Most people will spend more time planning a summer vacation than they will on their retirement account.”

Vanguard’s targeted funds, based on its well-known index funds, are more conservative, with an equity stake that scales down to 35 percent by retirement. Within about five years of maturity, the funds are merged with a static retirement income fund that is 20 percent invested in domestic stock and 80 percent in bonds, mostly in Vanguard’s total bond market index.

“Because we know nothing else about the person besides their retirement date, we erred on the conservative side,” said Catherine Gordon, a principle in Vanguard’s investment counseling and research group. “As we unfortunately found out in 2000, you have to take into account the portfolio’s ability to take a hit.”

Fidelity’s targeted funds take a similar approach, but rely largely on actively managed funds, with some holding various concentrations of up to 20 funds. Most companies charge expenses that are about equal to what an investor would pay to own the underlying holdings. But Fidelity’s Freedom funds include an additional 0.08 percent fee.

The biggest drawback of targeted funds is that, while they do much of the work for you, they are not individualized. Most companies will offer some guidance about how much you need to retire, but it’s not the same as having a plan drawn up just for you.

“Investors won’t get hurt doing this, but they might not get as good a result as they think they should,” said Joel Javer, a certified financial planner in Denver.


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