Do You Really Know What's Inside Your 401(k)? - Zweig [View all]

Leave it to Wall Street to take a cheap, simple, elegant idea and junk it up with fees, complexity and opacity.

That’s what’s starting to happen to target-date funds, the investment favored by tens of millions of people saving in 401(k)s and other retirement plans. A vehicle that couldn’t be easier to own may soon become too hard to understand. Many of these funds are getting cluttered with extra holdings. Things might get worse if so-called alternatives managers have their way and start stuffing illiquid, risky and often expensive private-markets assets into them.

Target-date funds are permanent autopilot portfolios that neutralize self-destructive investing behavior. More than two-thirds of all participants in 401(k) retirement plans hold at least one, according to the Investment Company Institute.

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These all-in-one funds solve all that. They hold stocks, bonds and other assets in predetermined proportions, scaling down risk as investors age. Along the way, if stocks fall too far too fast, these funds automatically buy; if stocks go up too far too fast, these funds mechanically sell. The saying “set it and forget it” was made for these portfolios. It isn’t much of an exaggeration to say that with target-date funds, the only decision you’ve had to make is which one to buy in the first place.

Many target-date funds are no longer the simple bundles of underlying funds they once were. Nearly 35% hold at least two dozen underlying positions, up from 29% a decade ago, according to Morningstar data. Crack open an all-in-one portfolio, and you’re likely to find both a growth and a value fund for large stocks, another pair for midsize companies and still another for small stocks. Then there might be stocks screened on other criteria, such as high profitability or minimal price fluctuation, or a couple of “strategic,” “discovery” or “dynamic” funds to make the mix sound more enticing.

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