Risk and retirement

The government wants to protect us from investment risk, but what kind of risk do they mean? A recent article in the New York Times (“You’re on Autopilot, but Check the Speedometer”) focuses on target-date funds, which adjust an investor’s asset allocation depending on when he or she plans to retire. The closer you are to retirement, the more “safe” bonds and money market funds you would have.

The federal government has approved these funds for use in retirement plans, which could mean an massive influx of money from plan participants. But the use of target-date funds is a one-size-fits-all approach that short-circuits some of the important questions that financial planners typically ask. How much money do you have to start with? What’s your tolerance for risk? What do you plan to do in retirement?

When retirement plan representatives talk about “risk,” they typically mean the risk that you may lose money over a given period of time. But given the debt load and woeful savings of the average American, the risk of not enough growth — though much less talked about — seems much much significant. Even someone who retires at 65 with a fairly large nest egg might need additional growth over a retirement that could last twenty or thirty years — and that means stocks.

The criticism that certain target-date funds get to 65 with too much stock, then, seems somewhat misguided. Finance professor Zvi Bodie believes that target-date funds with too much stock are “a disaster waiting to happen.” The PlanSponsor survey on which the article is based gives Fidelity’s target-date funds a D for risk.

Morningstar, on the other hand, gives most of those same funds four stars out of five for risk-adjusted performance. Fidelity apparently realizes that 65 is not the finish line, that stocks are an appropriate vehicle for long-term investors, and that even a retiree may be a long-term investor.