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The mutual fund where you can set it and forget it
Target date funds automatically adjust their holdings in anticipation of a specific date. They're not perfect, but they can be suited to people who might otherwise shy away from investing. - photo by Jeff Wuorio
Adjusting a portfolio to account for time frame, risk and other factors is a responsibility many investors would gladly hand off to someone else.

Thats one of the biggest lures of target-date mutual funds mutual funds that automatically realign their holdings over time with an eye to a specific date in the future.

They are often the simplest and best option for the average 401k participant who likely lacks either the knowledge of how to properly allocate their 401k, the time needed to do that or the interest, said Matthew Cosgriff, a Bloomington, Minnesota, certified financial planner.

Target-date funds are popular, but theyre not without flaws. Nor are they universally embraced by the financial professional community.

Despite all of the downsides, they are often the best option because they help to combat participants biggest hurdle inertia, Cosgriff said.

Target funds defined

Target-date funds are mutual funds designed to automatically rebalance their mix of holdings, including stocks, bonds and cash equivalents. A target-date fund is akin to a life-cycle fund in its adjustment feature, the primary difference being that a target-date fund is geared to a specific future date, such as retirement or the beginning of a college education.

Heres how that might play out. An employee looking to retire in 30 years could select a target-date fund for 2045. Given the relatively long time frame, the fund initially would likely be heavily weighted in stocks riskier than other choices but with the greatest potential for the largest returns. Over time, the fund would tone down its holdings to more conservative choices such as bonds and cash equivalents. This shift in balance is referred to as a funds glide path.

That sort of automatic adjustment, which takes place with no action on the investors part, is one of target-date funds biggest selling points. It can also help investors save themselves from overreaction to market volatility.

These funds can provide a simple, diversified solution for overwhelmed investors and take a lot of the thinking out of the process, said Houston certified financial planner Andy Brantner. It's sort of a set it and forget it option, which helps fight against the urge to be what I call a helicopter investor, someone who hovers over their investments looking for any sign of danger.

Some financial professionals also see target-date funds as suitable choices for first-time investors with little or no experience.

I suggest one consider them like training wheels as a way to get started with professional advice beyond just the buying and selling of underlying investments, said Cocoa, Florida, certified financial planner Ilene Davis.

One size does not fit all

Target-date funds have proven popular with investors. The research firm BrightScope projects target-date fund holdings will top $2 trillion by 2020. Part of that growth is somewhat inadvertent. With the passage of the 2006 Pension Protection Act, employers are required to identify a default option for staff who do not choose a specific fund for their pension contributions an ideal destination for set it and forget it target-date funds.

No matter how investors come to own a target-date fund, theyd do well to investigate some caveats. First off is expense. According to the research concern Morningstar, the average target-date fund expense ratio in 2014 was .78 percent not off the charts, but more expensive than the average .64 percent in 2014 and much more expensive than ultra lean choices such as index funds.

Many of these funds are offered from mutual fund companies that are actively managed and typically contain much higher internal expenses, said Brantner.

Another issue is performance. For one thing, target-date funds offer all sorts of exposure to stocks, bonds and other holdings, resulting in varied degrees of return. That can be particularly sensitive for investors approaching retirement. For instance, 2015 dated funds were down an average of 2.9 percent for the year as of Sept. 30, according to Morningstar.

Target-date funds from different providers have different asset allocations and glide paths, said Bob Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania. So, two people could buy different target-date funds and have very different asset allocations.

Perhaps an even greater concern is that target-date funds simply cant take into account the specifics of every investors needs.

The biggest limitation is that target-date funds attempt to standardize what can't be standardized every individual and couple have unique circumstances, goals and objectives, and most importantly, risk tolerance, said Johnson. What may be an appropriate asset allocation for one individual with a target retirement date of 2040, may be wholly inappropriate for another individual with a target-date of 2040.

A muted endorsement

It's critical for investors to examine a funds holdings both current and those projected to determine if they fit their preferences for growth and security at retirement. Fidelity, for instance, has increased the equity holdings in its target funds (the 2015 fund is more than half stocks.) Others, concerned that overexposure to equities at the point of retirement is risky, have trimmed stock exposure.

Anyone in a target-date fund should take a closer took at how the fund is currently invested and how it will be invested later on, said Stephanie Genkin, a certified financial planner in Brooklyn, New York. I think many people would be surprised if they actually cracked open their target-date funds and looked at its innards.

While some investment mixes may be too risky for some investors, others may want more growth potential during their two decades or more of post-work life.

The retirement date is day one of the rest of their life, said Tampa, Florida, certified financial planner Travis Sickle. Choosing a fund that aligns with your retirement date doesn't necessarily account for the length of your potential retirement.