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By Christine Benz and Josh Charlson, CFA | 02-11-2013 12:00 PM

Is Your Target-Date Fund a Medalist?

New Analyst Ratings for target-date funds now focus on a series' process, but there's more than one route to a top rating, says Morningstar's Josh Charlson.

Christine Benz: Hi, I'm Christine Benz for The target-date fund categories have been a rare bright spot within the mutual fund industry. Joining me to share the latest research on these categories is Josh Charlson. He is senior fund analyst with Morningstar.

Josh, thank you so, much for being here.

Josh Charlson: Hi, Christine, great to be here.

Benz: Josh, I think at this point most investors are familiar with the concept of target-date funds. They attempt to give you an age-appropriate asset-allocation mix and then gradually make it more conservative as the years go by. We've seen a really strong uptake in terms of asset flows into these categories. Let's talk about the magnitude of those flows.

Charlson: Target-date funds have continued to do really well in the fund industry. They've been one of the few areas to experience constant growth. They've tended to outgrow other broad asset classes in the fund universe. Last year, they took in net inflows of about $55 billion, growth of about 15%. There are a couple of reasons for it. One is going back to 2006, the Pension Protection Act, which made them qualified default investment alternatives in retirement plans, so people can be put into them immediately.

Benz: If you do nothing [in a company retirement plan], you might get opted into [a target-date fund].

Charlson: Right, such as if you're starting with a company [and participating in the 401(k) plan] or if they're switching their plan. And a lot of people just like them for their simplicity and ease-of-use. We think they're among the most easy-to-own types of mutual funds.

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