Cecily O'Connor
RedwoodAge.com

So-called target-date funds that shift into less risky assets as investors near retirement may not always be appropriately matched with workers' needs.

That's because some of these mutual funds are heavily weighted toward stocks, which can potentially hurt retirement savings in a down market, according to a study by  Watson Wyatt Worldwide, a global consulting firm. Additionally, target-date funds' "one-size-fits-all" approach doesn't always fit or complement individual retirement savings goals.  

For example, some funds for employees expecting to retire in 2010 still have about 70 percent of assets in equities, according to recent Morningstar Direct research. A subsequent Watson Wyatt analysis found "considerable variability" in asset allocations for employees in all stages of their careers.

In 2006, allocations to equities for employees 10 years from retirement varied from 80 percent to 40 percent among target-date funds. Equity allocations for employees on their retirement day ranged from 65 percent to 20 percent.

RedwoodAge.com randomly selected four 2010 target-date funds from Charles Schwab, Fidelity, T.Rowe Price and Vanguard to see differences in asset allocation, based on percentages of net assets as of March 31. Schwab and T.Rowe Price had the biggest equity allocations, with close to 60 percent stakes. 

In general, most financial planners would advise a worker to wind down their equity exposure as their retirement date nears to protect the assets. But pinpointing the exact percentage is dependent upon so many factors.

A 70 percent equity stake might not be too high for some individuals, depending on their risk tolerance and other sources of retirement income, said James Lamont, certified financial planner and principal of Lamont Financial Services in Novato, Calif. 

While Lamont had not seen the Watson Wyatt research, he echoed the sentiment that a one-size-fits-all vehicle can dangerous for some investors.  

"You're putting your whole life on the theory of asset allocation and this (mutual fund) companies interpretation of that theory," Lamont said. 

Set It, but Don't Forget It
Target-date funds have been touted as a way for retirement investors to eliminate confusion about asset allocation and portfolio rebalancing since these funds automatically adjust their cash, bond and stock holdings. Essentially, the funds become more conservative as one's retirement date arrives.

Employers often favor target-date funds as part of their 401(k) offerings because they are simple for employees to use - employees provide an estimated retirement date, and the investment begins.

Given this kind of ease, target-date funds continue to attract retirement investors' attention. There were about $200.4 billion in assets among a total of 320 target-date funds as of April 30, which is up 38 percent from $145.5 billion last year, according to Morningstar. 

So many offerings, however, also means there is a lack of "consistent philosophies" among funds because products with very similar names can have very different compositions, warned Robyn Credico, national director of Watson Wyatt's defined contribution practice. That's why employers and workers alike should be more mindful of the differences.

"As more employers begin to automatically enroll employees who do not choose 401(k) investments in target-date funds, understanding the amount of return received for the risk grows in importance," Credico said. "If the funds are not appropriately matched with employees' needs, employers could see many workers delay their retirements."

As a result, Watson Wyatt is urging employers to take several steps to ensure their workers' savings strategies don't backfire. This includes frequent review of plan design to ensure the appropriate investments are offered and communications given to participants. It's also smart for employers to look at various types of bonds to determine which effectively reduce portfolio risk. Lastly, employers should determine how to maximize investing rewards through diverse investments.

"With many employees not saving enough, it is important to understand that adding risk to investments does not offset this and guarantee success. An overly risky strategy could backfire," said Mark Ruloff, director of asset allocation at Watson Wyatt. "As a result, it makes sense for employers and employees to take another look at the target-date funds in their 401(k) plans and consider whether the risk profile is right for them."