One of the latest financial "innovations" to hit the world of retirement accounts and retirement investing is the targeted retirement fund. For some people, this can be a real lifesaver, helping to manage a retirement account with minimal effort and investment knowledge. However, as with most investment decisions, the "set it and forget it" mentality has a few problems.
How targeted retirement funds work
The whole idea behinds targeted retirement funds is that you choose a target retirement date and then fund managers automatically adjust your stock-to-fund ratio through the years, according to what will best fit your needs as you move closer to retirement. This ratio is usually more stocks the younger you are, and then a shift to safer investments as you near your target retirement date.
What lies beneath
Interestingly enough, targeted retirement funds aren´t straight funds. They actually consist of funds of funds. Exchange Traded Funds and mutual funds are picked out, from a list of possibilities pre-approved by the company for targeted retirement funds and, in some cases, by you. If you are going to go with a retirement account that has a target and automatic fund adjustment, you need to look at the funds beneath, and assess their quality. As you can see, even though these retirement accounts are touted as "easy" and requiring minimal effort, the fact is that you still need to do some research.
A variety of choices
Most of the big guys – T. Rowe Price, Fidelity, Schwab, Vanguard, Hartford – offer different targeted retirement plans. However, each is radically different from the other. Before choosing a targeted retirement plan, you should carefully research the funds, the underlying funds, and the other factors (especially fees!) involved. Some companies require an opening purchase of as much as $3,000, while others do not require any opening purchase. So, just as with any other investment, retirement account or otherwise, it is important to research the angles and learn what you can.
Who knows? Maybe if you research targeted retirement plans long enough, you will become confident enough to manage your own account successfully.