Study of 28 such funds points to frequent too-high correlation with stocks. The variability of risk levels for target-date mutual funds could have an impact on increasing numbers of 401(k) plans that employ such vehicles.

"Target-date funds are a terrific idea but our analysis suggests that the choice of manager, particularly with regard to the level of risk that is taken, is vitally important," says Joseph Nagengast, president of Turnstone Advisory Group, which recently published a study on the topic with retirement-plan trade publication PlanSponsor. "Target-date funds progressively change an asset allocation in order to meet the accumulation and stability needs of employees as their career moves toward retirement."

Timed, but not always attuned

The study, Analysis of Target-Date Fund Families, looked at 28 fund families. The authors contend that exposure to equity is frequently too high in these funds while exposure to fixed income is too low. This may be the result of risk models equating pension-plan risk with risks borne by individual 401(k) accounts.

This is significant, "because target-date funds are quickly becoming the most commonly-held investment for retirement-plan participants," says PlanSponsor's CEO Charles Ruffle. In addition, the Turnstone-Plansponsor study shows wide variance "from asset allocation to fees."

Individual target-date fund performance can be misleading because funds with the highest equity exposures -- and therefore highest levels of risk -- show higher returns in the past recent than those with only moderate equity exposure.

"Unfortunately, the best-performing funds may be prone to suffer the largest losses, during the type of market correction we have just experienced or [in] a full-bore bear market," says Nagengast. "Younger employees have time to recover lost gains, but employees nearing retirement may lack that option."

"Target date funds may not be perfect solutions, but for the vast majority of 401(k) participants, they represent a marked improvement over their own fund choices," says Ruffel. "That's why helping them make the best choice among the growing number of target date options is so important."

Marina Del Rey, Calif.-based Turnstone is an institutional investment consultancy and advisor to IRAMinder, an affiliated IRA-rollover service provider. -FWR

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