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Retirement Planning: Redefining Conservative February 24, 2009

Posted by retirementwithaplan in retirement.
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It seems that there are now three distinct groups of investors. The first believes in the markets and the risk they offer, the second never really defined how they felt about risk looking instead at past performance as an indication of future results, and the last group thought the suggestion in the Pension Protection Act of 2006 to use lifestyle funds or target-dated funds was adequate enough to avoid any losses. Each group lost in the preceding months yet some expected, even hoped that they would be the exception to the rule.

per022409_riskAs to risk, the perils are plenty. Mutual funds are quick to point out these risks in their prospectuses – you know, that publication you never read, online or off. (To read about some of these risks, check out our in depth exploration of them). Underestimating these risks, coupled with an unforgiving, all-inclusive downturn has left many investor wondering whether the trouble of investing was worth the effort. Those that failed to understand the risks of investing are stunned into silence while many of them have simply gravitated towards funds that promise a put-and-go investment style.

Not a day goes by without someone, somewhere asking me what I think of the markets. These folks have the look of utter disbelief on their faces, suggesting that they thought, as long as they kept funneling money into their defined contribution plans that they would make more money. And if you had done this over the past decade, you would have and that would have fed your complacency, given you a false sense of confidence and offered you a dream of what retirement would look like with barrels of cash.

But the ones who are in the greatest shock are those with target-dated funds. These funds “target” a date for your retirement and supposedly realign your investment risk as you approach that date. They almost guaranteed that you would not have the same troubles as an investor who chose to adjust their own risk.

The rude awakening has shocked so many people, that Congress is now wondering if their suggestion to use these funds as the default setting for those who chose not to invest in the company’s 401(k) was wise or not conservative enough. These funds have no track record of performance and because there are so many different fund families offering these investments, it is difficult to pin down the style. Some target-dated funds set at 2010, lost almost 20% of their shareholder’s value – right before their retirement age.

When Congress meets on Wednesday, they will discuss the subject. According to a recent article in the Washington Post “The Senate’s Special Committee on Aging is expected to ask the Department of Labor tomorrow to establish regulations governing the composition and advertising of target funds. It is also planning to request that the Securities and Exchange Commission look into similar concerns.”

If you were lured into these types of funds with the promise that you would not have to do the manual labor of rebalancing your investments as you get closer to retirement or they suggested that because the fund manager would do the heavy lifting for you, you were misled.

Inside these funds are often more funds that failed to attract investors or lost so much, that they would be faced with closure. Instead of closing the funds, they simply rolled investor dollars from target-dated funds into them, breathing new life into what would have once simply faded into the dustbin of failed investment ideas.

Target-dated funds can be used by the less savvy among us but should be used with an eye on skepticism. Targeting a date several decades beyond what you would normally have though of as your retirement date is just as effective as pinpointing the exact year.

The false sense of security came at a time when the markets began to swoon. And now investors want a conservative approach, one that protects their money and their futures. Congress, at least in the instance, is not the right place to seek help.

Your investments begin with you. And if you can’t take an hour a month to reevaluate what you are doing, take a look at where your money is going or reassess your risk, your elected officials will not be able to help.

They meet on Wednesday and I will be watching the proceedings closely.



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