NEW YORK -- 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 have since 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 the decision-making on autopilot. The funds used to focus on just U.S. stocks and bonds, but they're now buying a broader mix of investments, from foreign stocks to commodities, as well as making other changes. Many of the moves made in recent years are helpful for investors in the long term, analysts say. But the changes could also make short-term returns choppier.
A reminder of what target-date retirement funds are: They offer a one-stop shop for nest eggs. Savers pick a fund set for the year that they hope to retire: Early 30-somethings might pick a fund targeted at a retirement in 2045.
When retirement is far off, target-date funds invest heavily in stocks. That's because investors have the luxury of time to ride out dips that may occur. Each of the three biggest target-date fund providers -- Fidelity, 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 of their 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, steadily dropping along the way.
The funds do all this shifting on their own, investors don't have to do anything. Such convenience even has attracted experts on how to choose a mutual fund.
Janet Yang's job is to study fund managers and investing as a fund analyst at Morningstar, and she's one of the many who have helped target-date funds grow to more than half a trillion dollars in assets.
"I have tons of managers of individual funds that I love," Yang says. "But I think about 80 percent of my retirement assets are in a target-date fund."
Here are some guidelines to keep in mind as you consider target-date funds, as well as some of the ways that they've changed in recent years:
-- They're built to be the only fund that you own for your retirement savings.
The financial industry has preached the benefits of diversification for years. By spreading your nest egg across many different stocks and bonds, the chances drop that one bad investment can torpedo your retirement. But some have taken the advice a step too far.
Some investors feel they need to own many different mutual funds to be diversified, 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 (WFDTX) has 43 percent of its money in stocks, for example, while T. Rowe Price's Retirement 2020 fund (TRRBX) 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 last year, and European stocks are climbing as worries about the region's debt crisis fade. Target-date investors have reaped those gains as the industry has upped its reliance on foreign stocks. The average 2040 fund, for example, has 36 percent of its stock investments in foreign companies. That's up from 24 percent in 2005, according to Morningstar. Target-date funds are also increasingly going abroad for their 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. Last year was the first time that more dollars flowed into funds that invest in index funds than actively managed funds. Vanguard is the industry's second-biggest player, and its 2040 fund (VFORX) is made up of four Vanguard index funds.
-- They're getting cheaper to own.
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 that $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.
Target-date funds manage how your savings are invested, but that's only part of building a nest egg. "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."