Target date funds have become a very popular way for people to invest in their 401k. Target-dated funds are mutual funds that automatically adjust the asset mix of stocks, bonds and cash usually based on the investor’s future retirement date. There are a lot of people out there that don’t want to take time to think about if they are invested in the right balance of stocks and bonds. Target date funds take care of this balancing act for them. As people get closer to retirement age, they have less time to weather the ups and downs of the stock market. Because of this, as retirement draws near, these funds have traditionally been adjusted to be in less risky investments. Bonds have often been considered less risky at times than stocks and therefore the closer the target date, the more these funds may tend to be heavily bond-loaded than stock-loaded.
Recently there has been some debate as to whether these target date funds have a hidden risk. As the market has become more volatile, some fund managers have been moving toward more bond funds. According to WSJOnline.com “Of the 45 funds with a target date of 2016 to 2020 tracked by investment-research firm Morningstar Inc., the average has about 32% in bonds and about 58% in stocks—up from 25% in bonds and 67% in equities three years ago.”
The concern is that there is debate as to the safety of these bond funds and that this move could actually cause more risk. Some experts believe that the bond market may be headed for trouble.
For an interesting discussion of how the different fund managers perceive this to be a possibility, check out the Wall Street Journal article: Hidden Risks in Target Funds