Nearing Or In Retirement? Better Check Those Target Date Fund Allocations

The emergence of the target date fund has been one of the best developments for retirement savers. Whereas many workers were once paralyzed by the thought of building a well-balanced retirement portfolio on their own, they can now, in many cases, simply choose a target date fund in their 401(k) and get the benefits of professional management, diversification and automatic portfolio rebalancing all in one spot without the hassle of having to manage and maintain their investments.

But target date funds are not created equal. The asset allocation of such a fund is dependent entirely on the decision making of the fund provider. While funds may share a similar target date, they may have significantly different allocations making some funds riskier than others. Some savers during the financial crisis found out this lesson the hard way. They thought their portfolios were invested conservatively as they neared retirement only to find that many were still heavily invested in stocks. The AllianceBernstein 2010 Retirement Strategy fund was a few years away from its anticipated target date but was still about ⅔ invested in equities. The fund dropped over 32% in 2008. Granted, that was the financial crisis and just about anything related to equities lost money around that time but a healthier allocation to bonds and cash so close to the target date would have been much less painful for shareholders who had to delay retirement.

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