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Fund Spy: Morningstar Medalist Edition

Target-Date Funds: Good Behavior Leads to Better Results

Target-date funds' built-in discipline makes for an industry anomaly: positive investor return gaps.

Target-date funds have become a prevalent investment for American workers saving for retirement, and Morningstar's 2016 Target-Date Fund Landscape report covers the ins and outs of these strategies, including how to choose and evaluate them. The funds can differ from one another in a host of ways--from holding in-house versus outside funds to using index-based or active underlying strategies.

One of the key decisions for investors choosing between target-date series continues to be how much market risk--often characterized by equity exposure--to assume at different points along the asset-allocation glide path. The argument for taking less market risk sometimes centers on the concern that investors are prone to abandon their long-term investing plans in the face of market downturns. The theory posits that a lower equity exposure helps to mitigate losses in market dips, and investors in lower-volatility funds are less likely to be spooked enough to sell into a market trough, avoiding potentially locking in losses and missing a market rebound. A related concern is that retirees using target-date funds will have to sell shares in down markets to meet their income needs, and those withdrawals will also miss out on any market turnaround.