Jeff Tjornehoj on "Business for Breakfast" 1060 KRCN Tuesday, September 19, 2006 - Target Retirement Funds

A: Well, guys, you don't have to look very far to see that "targetretirement" funds are the "in crowd" these days.

Q: These might be new to some of our listeners--what are they and who needsthem?

A: Target retirement funds--sometimes called "life cycle" funds--are fundsdesigned to fit the typical investor's risk and return needs, depending onthe expected retirement date. If retirement is just around the corner, thefund is heavily weighted toward investment-grade bonds. If retirement isdecades away, then the fund concentrates on stocks. A key feature of theseinvestments is that they are "funds of funds," meaning they rarely buyindividual stocks and bonds; instead, they invest in stock and bond fundsmanaged by the same fund company. And the mix of funds gradually becomesmore conservative as the target date is reached.

Q: So, no more researching and rebalancing?

A: That's the idea anyway. It's still a very good idea for investors towatch how their fund stacks up against the competition, no matter what theinvestment.

Q: You mentioned that these kinds of funds invest in other funds managed bythe fund company? Does that ever pose a conflict?

A: Not a legal conflict--there's nothing shady about these arrangements. Oneearly criticism--and one that's often leveled at funds of funds--is that fundcompanies will try to stuff investor money into poorer-performing productsor ones that haven't caught on and need cash to stay alive. Because of thehigh profile these funds get from the press, financial planners, andvigilant investors, I don't believe that criticism is warranted. If thefunds don't field their best players, they're going to get trounced by thecompetition.

Q: Is there much difference between them?

A: There's a huge difference between, say, a fund with a target date of2010 and one that's dated 2040. But even within same-date funds there is asubstantial variation in one-year returns. For instance,AllianceBernstein's 2010 fund has returned nearly 10% in the past year,while AIG's is about 2.5% and DWS's (the old Scudder brand) is a tad over1%. So, yes, the differences are there. What's important to understand isthat if a fund company doesn't have good funds to begin with, it's going tohave a tough time beating its peers, unless it rolls the diceoccasionally--and wins. So, watch the volatility of these funds. The onesthat bounce back and forth--top of the heap this quarter, dead last nextquarter--are the gamblers.

Q: Good advice. Thanks again, Jeff.

A: Thanks for having me.

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