Are you on target–or totally missing the point?

Target-date funds can be a good choice for people new to investing, or those who simply don’t want to mess with the details of picking asset allocations and rebalancing their portfolio. Many big-company 401(k) plans now offer target-date funds, as do most big mutual fund companies and brokerage firms.

These funds do all the heavy lifting for you, gradually adjusting the investment mix over time so you take less risk as you approach your “target date”–typically a year near when you plan to retire.

But apparently a lot of people have misconceptions about target-date funds and what they can accomplish.

Behavioral Research Associates interviewed 250 Americans and found that many thought the investment option offered some kind of guarantee. For example:

•    Over 60% of employees say that investing in target-date funds means they will be able to retire on the target date.
•    38% think target-date funds offer a guaranteed return.
•    30% of workers think they can save less money and still meet their retirement goals if they invest in a target-date fund.
•    Over 23% of workers believe that there is little to no chance that they will lose money either before or after the target date.
•    41% think there is little to no chance of losing money in any one-year period, and
•    70% think they are equally as likely or less likely to lose money in any one-year period, as compared to investing in money market funds.

Obviously, none of these misconceptions is true. Target funds adjust your risk over time, but they certainly don’t eliminate it. Even when you approach your retirement date, your target fund may still have half or more of its assets in stocks.

That doesn’t mean you should bail on your target-date fund, but–as with all investments–you should understand the real risks and rewards.

You can CLICK HERE to read the researchers’ comments to the SEC and Department of Labor about their findings.

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