Retirement Strategies

Focus on Investing

Target-date and risk-based funds

Last month, local governments across the country spent time and effort putting together programs and activities designed to get their employees engaged and interested in saving during National Save for Retirement Week—the goal of which is to make workers more aware of the need to save for retirement and to use their employer-sponsored plans to do so.

After the week is over, however, it is important to continue promoting good savings habits. One simple way to do this is to encourage employees to save through their employer-sponsored target-date or risk-based funds.

Choosing the right investment vehicles to include in a retirement portfolio and monitoring them over time can be challenging. Target-date funds, also called life-cycle funds, make saving for retirement simple by providing investors with an all-in-one investment strategy that automatically changes to match their ages with an appropriate level of risk as they move closer to retirement.

With target-date funds, investors simply pick a fund with the target date closest to the year in which they want to retire or to begin withdrawals. Investment professionals, instead of the investor, reallocate assets to reflect an increasingly conservative mix as the target date approaches. In this way, the overall risk is reduced as the time remaining until the target distribution date becomes shorter. However, management of the fund by investment professionals does not stop on the target date but continues for the life of the investment.

Risk-based funds, sometimes called model-portfolio funds, work the same way, only instead of selecting the fund based on age, investors choose a fund based on their personal risk tolerance.

Risk-based funds, like target-date funds, include an automatic rebalancing feature—maintaining a target balance between equity and fixed-income funds—to ensure the fund’s allocation remains on track. In some market cycles stocks may significantly outperform bonds, and in other market cycles the opposite will be true. With these types of funds, investors will identify the level of risk to take depending on where they are in relation to withdrawing and then investment professionals monitor the assets and regularly rebalance the funds.

The benefits of target-date and risk-based fund investing are clear: they are solutions for individuals who lack the time or the comfort level to select or manage their own self-selected portfolios.

These one-stop investment solutions provide public employees with an easy way to take advantage of investment strategies without the need to become an investment expert. The government employers that offer these investments are providing retirement savings solutions to their employees.

For more information on choosing a target-date or risk-based portfolio, use ICMA-RC's online investing guides at www.icmarc.org, located in the planning and tools section.

Joan McCallen
President and CEO
ICMA-RC
Washington, D.C.
www.icmarc.org

This article is intended for educational purposes only and is not to be construed or relied upon as investment advice. The ICMA Retirement Corporation does not offer specific tax or legal advice and shall not have any liability for any consequences that arise from reliance on this material. It is recommended that you consult with your personal financial adviser prior to implementing any new tax or retirement strategy. Vantagepoint securities are sold by prospectus only, and the prospectus should be consulted before investing any money. Vantagepoint securities are distributed by ICMA RC Services, LLC, a broker dealer affiliate of ICMA-RC, member NASD/SIPC. ICMA Retirement Corporation, 777 North Capitol Street, N.E., Washington, D.C. 20002-4240; 1-800/669-7400; www.icmarc.org. AC: 0508-2156.

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