"Of Mutual Interest"-Penelope Wang, Senior Writer at "Money" Magazine
Tuesday, November 11, 2008PAUL KANGAS: In tonight's "Of Mutual Interest" segment, a look at how one type of relatively new mutual fund is doing in this very volatile marketplace. Joining me now to talk about target date funds, Penelope Wang, senior writer at "Money" magazine. Welcome back to NBR, Penny.
PENELOPE WANG, SENIOR WRITER, MONEY MAGAZINE: Great to be back, Paul.
KANGAS: Let's have a bit of background first, Penny. Target date funds are kind of one-stop shopping for mutual fund investors, is that true?
WANG: Yes, that's right. They're an increasingly popular type of fund that's often found in 401(k) and other retirement plans as well as outside them. There's some $200 billion that's in these funds these days and employers often use them as a default choice in 401(k) plans. So, employees often find themselves automatically enrolled in them. The idea is that they're a ready-made portfolio that automatically shifts to become more conservative as you approach retirement. So, it resolves the problem of employees putting too much money into cash, which doesn't give you sufficient returns.
KANGAS: Well, it's a good idea, but not such good performance recently, I assume.
WANG: That's right. Like everything else, target date funds have been pretty hard hit in this market and it's been a special problem for those employees approaching retirement.
KANGAS: Penny, do you have some examples of these target funds?
WANG: Yes, target funds are not all alike and some are more aggressive than others. One in particular, Oppenheimer Transition 2010, for example, keeps the bulk of its portfolio in stocks even for those approaching retirement and that's down almost 40 percent year to date.
KANGAS: The ticker is OTTAX, correct?
WANG: That's right.
KANGAS: It looks like it's had a rough time of it, to say the least. But you like to buy them when they're cheap, right?
WANG: That's right. The trick is if you are approaching retirement, you can ride out the downturn and wait for the market to bounce back.
KANGAS: How about another example?
WANG: Well, on the opposite end of the spectrum, you have MFS Lifetime also for the 2010 date and it only has 30 percent in equities. And so it has held up relatively better. It's down 15 percent which isn't great, but it looks good in this market, I guess.
KANGAS: MFSAX is the ticker there, correct?
WANG: That's right.
KANGAS: Similar chart to the Oppenheimer fund, but not as much damage. What is the bottom line, then, for mutual fund investors who want to put their money into target date funds?
WANG: Well, the trick is you have to check carefully to see how much risk the fund is taking. And if you are approaching retirement and you're keeping the bulk of your money in this fund, you want to make sure you have enough in cash to ride outs the market downturn. Otherwise, you could miss your retirement target.
KANGAS: OK. We have a few seconds left, any other thoughts?
WANG: Well, for many investors approaching retirement, you also want to think about saving outside your 401(k) as well. That may be a place to build up cash to last you until the market bounces back.
KANGAS: Very sound advice for any investor, Penny. I want to thank you for joining us once again tonight.
WANG: Thanks, Paul.
KANGAS: Our guest, Penelope Wang senior investor at "Money" magazine.
