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Target Date Funds in Your 401k: Nice Idea, But How Well Invested?

I like the idea of target date funds, also called life cycle funds. You pick a date in the neighborhood of when you expect to retire. When you are many years away from the date, the fund invests heavily in stocks. As your retirement date nears, the fund shifts its allocation away from stocks and into bonds. This is just what I recommend that you do.

However, the actual management of the target date funds is a bit murky. The Wall Street Journal reports (Nov. 3, p. R2) that actual practice varies considerably. Take a look at 2010 target date funds, which are only two years away from the target date. The most conservative of such funds has 26 percent of assets in stocks, but the most aggressive is two-thirds invested in stocks. In other words, if you have a target date fund, you don't know what you have.

If you have the slightest tendency toward being a do-it-yourselfer, consider setting your own allocations, using the guidelines in Chapters 3 and 4 of The ABCs of Your 401k. However, if you are the type of person who won't ever get around to re-adjusting your 401k as you get closer to retirement, then stick with the target-date funds.

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