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Fund Spy

What to Make of Target-Date Funds' Allocation Tweaks

Be prepared for potential performance gyrations and continued changes.

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Target-date funds are designed to be very long-term holdings. They're constructed as one-stop-shopping options that offer broad exposure to stocks and bonds, and they grow more conservative over time as they near their target date (which is meant to roughly coincide with an investor's retirement date) and after they surpass it.

However, investors should be aware that, since launching the funds, some fund shops have tweaked their target-date funds' asset allocations, and the way in which those allocations change over time. (The latter is often referred to as a glide path and can be found in a target-date fund's prospectus.) That might be surprising, given the funds' long-term goals and the fact that so many target-date funds are still relatively new--more than 60% of the funds in Morningstar's three target-date categories (target-date 2000-2014, target-date 2015-2029 and target-date 2030+) have been in operation for less than three years, and more than 85% don't have five-year track records. Moreover, it's worth noting that some of the allocation changes we've seen could cause those funds to get whipsawed over the short term. In other words, some moves have boosted exposure to asset classes that have enjoyed strong recent performance, or reduced funds' stakes to securities that have been hit hard.

Alliance Tones It Down 
AllianceBernstein's target-date funds came to market in late 2005, 2.5 years into a strong rally by riskier fare such as debt-heavy firms and lower-quality bonds, with one of the more aggressive glide paths around. The AllianceBernstein Retirement Strategy Funds initially put 10% in real estate investment trusts, no matter what the age range. It also kept more than a fourth of the funds' assets in international stocks until age 40 and did not introduce bonds to the portfolios until age 45, and even then it was mostly high-yield bonds. It backed up its equity-heavy allocations with a lot of research, including a 60-page white paper that maintained that getting too conservative too early was riskier than holding generous stock helpings before and after retirement, because it increased the odds that investors would run out of money--or not be able to maintain desired spending levels--in their golden years.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.