Simple is good when it comes to investing for retirement. But even after you find something simple, you can’t take it easy. That’s the case with target-date retirement mutual funds, which some advocates call ‘‘set-it-and-forget-it’’ investments.
If you began putting money in a target-date fund five years ago and then tuned out, it’s undergone some transformation. The changes go beyond the gradual shift from stocks to bonds that all target-date funds are designed to undergo. They are more fundamental.
Target-date funds take care of how to divvy up a retirement account among stocks and bonds, allowing savers to put such decision-making on autopilot. The funds used to focus on US stocks and bonds, but they’re now buying a broader mix of investments, from foreign stocks to commodities.
Many of the changes are helpful for investors in the long term, analysts say. But they could also make short-term returns choppier.
Target-date retirement funds offer a one-stop shop. Savers pick a fund set for the year that they hope to retire: Early thirtysomethings might pick a fund targeted at a retirement in 2045.
When retirement is far off, target-date funds invest heavily in stocks, because investors have time to ride out dips. Each of the three biggest target-date fund providers — Fidelity Investments, Vanguard, and T. Rowe Price — keeps at least 85 percent of its 2045 fund in stocks.
As the years progress, target-date funds shift some money from stocks into bonds and cash because investors should take less risk as retirement approaches. Fidelity’s target-date funds reduce the percentage of assets held in stocks from 85 percent to 50 percent over the course of 30 years.
The funds do all this shifting on their own; investors don’t have to do anything. Here are some guidelines on target-date funds:
■ They’re built to be the only fund you own for your retirement savings.
By spreading investments across many stocks and bonds, the chances drop that one bad investment can torpedo your retirement. But some have taken the advice too far.
Some investors feel they need to own many different mutual funds, says Jim Lauder, who helps run the Wells Fargo Advantage Dow Jones Target Date funds. They shouldn’t if they own a target-date fund. Each holds hundreds of stocks and bonds from around the world, and managers have constructed them to be diversified.
■ Two target-date funds for the same year can look very different.
Some providers are more aggressive, putting a heavier emphasis on stocks, while others are more conservative. The Wells Fargo Advantage Dow Jones 2020 fund has 43 percent of its money in stocks; T. Rowe Price’s Retirement 2020 fund has 68 percent.
That will lead to differences in performance. In 2008, when the financial crisis was pummeling stocks, the Wells Fargo fund lost 22 percent. That was a milder drop than the 33 percent loss for the T. Rowe Price fund. But the recovery in stocks since the recession means the T. Rowe Price fund has had stronger returns the last few years.
■ They’re becoming more foreign.
Japanese stocks have been some of the world’s best over the past year, and European stocks are climbing as worries about the region’s debt crisis fade.
The average 2040 fund, for example, has 36 percent of its stock investments abroad, up from 24 percent in 2005, according to Morningstar.
Target-date funds are also increasingly going abroad for bond holdings.
■ They’re becoming more passive.
Target-date funds are typically made up of other mutual funds. The majority of the industry’s assets are invested in actively managed mutual funds. But a growing number of target-date funds are relying on index funds, which passively follow an index rather than try to beat it.
■ They’re getting less expensive.
Expenses are going down as a direct result of the increased focus on index funds. Target-date funds have an average expense ratio of 0.91 percent, which means $910 of every $100,000 invested goes to pay for manager salaries and other fees each year. That’s down from $1,040 in 2008.
■ They don’t magically solve the problem of saving for retirement.
‘‘No retirement income product is going to be successful if you haven’t saved enough,’’ says Brett Wollam, senior vice president of Fidelity Investments Life Insurance. ‘‘Save more and save earlier.’’