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Assets in these funds have more than quadrupled since 2007. For employees, the funds appear very straightforward, requiring only the choice of an expected retirement date. Once a fund with an appropriate target date is chosen, investment professionals take charge. They decide on a mix of assets that gradually becomes more conservative as the employee nears retirement. “Workers are delegating back to their employer the asset-allocation decision,” says Stephen P. Utkus, principal of the Vanguard Center for Retirement Research. Put another way, workers are delegating to their employer, who is then delegating to the plan provider it has hired, to run a target-date fund within a 401(k). The T.D.F is typically comprised of a mix of mutual funds run by the plan provider. There is a very wide range of T.D.F.’s, and that may be a problem because they have a whiff of the old Wild West about them: just about anything goes. For example, Morningstar found that among three dozen funds with a target retirement date of 2025, the percentage of fund assets invested in stocks ranged from 38 to 86 percent, with an average of 70 percent. The retirement investment industry and Washington regulators have basically left it to investors to figure out what their T.D.F.’s contain, and to decide if their plan dovetails with their risk and return expectations. These funds are also not immune to some well-worn fund and 401(k) maladies, including possibly high fees and a presumptuous belief that active management can consistently beat passive indexing. But what T.D.F.’s do quite well is distance investors from their worst enemy: themselves. By hewing to a long-term investment allocation strategy and rebalancing whenever the markets throw the portfolio off that strategy, they insulate investors from many emotional and psychological barriers that can make it hard to stick with a given approach. “It’s akin to a stereo system,” said Meir Statman, professor of finance at Santa Clara University in California and author of “What Investors Really Want.” “Rather than having to purchase all the individual components and figure out how to make it work together, a T.D.F. is like buying a single, integrated system. Maybe you give up some flexibility, but that’s still a good trade-off for many investors.” That idea offers some comfort to many investors. A recent ING survey of 401(k) investors found that those who used a T.D.F. were more confident about their retirement prospects than investors who didn’t own such a fund. Assets in target-date funds grew to $374 billion at the end of 2011 from $71 billion four years ago. The Employee Benefit Research Institute, a nonpartisan group that specializes in economic security issues, says that nearly half of workers hired in 2009 and 2010 who were enrolled in a 401(k) owned a T.D.F.; in 2006, just 28 percent of new hires did. Vanguard, a big manager of target-date funds, says it anticipates that 75 percent of employees enrolled in its plans will own such a fund by 2016. The growing popularity has been aided by a big nudge from Washington. In 2006, the Labor Department allowed employers to automatically enroll employees in 401(k)’s, and when employees did not actively choose among the funds offered in a plan, employers could also automatically put them into a T.D.F. that matched their expected retirement age. But automated simplicity isn’t a magic bullet. “The potential problem is that the T.D.F. you are given isn’t really that good,” Professor Statman says. For example, a recent survey by Callan Associates, an investment consulting firm, found that 63 percent of such funds used actively managed funds and that an additional 17 percent used a mix of active and index-based funds. Historically, active management has been less effective than passive index-based investing. “The fact is, after investment fees are subtracted, active management is a loser’s game,” says Tom Idzorek, global chief investment officer at Morningstar Investment Management . On an asset-weighed basis, the average annual expense ratio charged on target-date funds is 0.61 percent, according to Morningstar. Vanguard, which has an average charge of 0.18 percent for its T.D.F.’s, is the only major manager that emphasizes index-based funds for them. Target-date funds that are actively managed tend to have annual expense charges above 0.70 percent — though many exchange-traded funds charge less than 0.30 percent.
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