"Of Mutual Interest," -Retirement Fund Target Date
Tuesday, August 21, 2007SUSIE GHARIB: Well, it`s easy to feel overwhelmed when picking investments for retirement. One solution may be what`s called a "target date" retirement fund. In tonight`s "Of Mutual Interest," Erika Miller explains how those funds do the work for you.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ann Marie Miglorino is an exercise physiologist, who recently started saving for retirement. Although she can interpret complex medical charts, she`s perplexed by financial charts.
ANN MARIE MIGLORINO, INVESTOR: I don`t understand the stock market at all. And, really, to do well in it, to flourish in it, you kind of have to follow it regularly, religiously. And I don`t do that at all.
MILLER: With little interest in investing, she opted for a target date retirement fund, basically a "set it and forget it" strategy. As Schwab`s chief investment officer of equities, Jeff Mortimer, explains, all investors have to do is pick a fund with a year that`s close to their retirement date.
JEFF MORTIMER, CHIEF INVESTMENT OFFICER, EQUITIES, CHARLES SCHWAB: Instead of you having to go through and pick through mutual funds and determine what your allocation may be -- instead, you can pick one fund that will do all of that work for you, invest in underlying funds underneath, and then get more conservative as you age -- literally, one- stop shopping.
MILLER: That`s the main reason target date retirement funds have surged in popularity. Assets ballooned to almost $114 billion in 2006. That`s an increase of more than 300 percent in just three years.
All target date retirement funds have a "fund of funds" structure, investing in up to a dozen underlying mutual funds. Over time, the portfolio becomes more conservative and less volatile. But target retirement funds can operate in very different ways. Funds with the same retirement date could have big differences in asset allocations, investments, and risk. That`s part of the reason financial planner David Frisch is critical of the one-size-fits-all approach. He also says its important to consider more than just time horizon when picking investments.
DAVID FRISCH, FINANCIAL PLANNER, FRISCH FINANCIAL GROUP: People have different cash flow needs. They have different asset bases. They have different tax consequences. There may be longevity issues in the family, where maybe you`ll be retired for 20 years, and others may be retired for 40 years.
MILLER: In addition, it can be difficult to track relative performance of target funds, because there`s no appropriate benchmark. Critics also warn of high expense ratios for some funds, which reduce an investor`s return.
FRISCH: There`s double layers of fees, so they`re not -- low maintenance doesn`t equal low cost.
MILLER: Mutual fund experts predict target retirement funds will continue to surge in popularity. That`s because they are rapidly becoming the default investment option for many company retirement plans. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
