According to a 2009 Fortune magazine article that appeared on the CNNMoney website, target retirement funds are meant to be a one-choice solution to saving for retirement. Index funds are a low-cost way to invest in a portfolio of stocks or bonds. The choice between the two types of funds depends on how much control and time an investor wants to put into her retirement savings plan.
Target Retirement Funds
Target retirement funds have names such as Target Retirement 2025 or Freedom Fund 2030. The funds are designed to allocate assets among stocks, international stocks, bonds and cash to provide a mix of investment classes as a fund investor's retirement age approaches. A target 2025 fund has a higher bond percentage and lower stock percentage than a target 2045 fund. The fund manager adjusts the asset allocations as the target date of the fund approaches.
Index Mutual Funds
Index mutual funds are set up to hold the same securities as a specific stock or bond index. Index funds typically are invested exclusively in stocks or bonds. Indexes can range from sector specific funds, such as an energy stock index fund, to funds that hold almost every stock sold on the exchanges. Expenses are lower for index funds than for actively managed mutual funds. Investors select index funds on the theory that, over the long term, fund managers cannot beat the market, and a low-expense fund that matches the market will provide a superior return.
Target retirement funds consist of several index funds from the mutual fund company's family of mutual funds. For example, the Vanguard Target Retirement 2030 Fund is composed of the company's Total Stock Market Index Fund, Total Bond Market II Index Fund and Total International Stock Index Fund. The fund manager for the Target Retirement Fund selects the allocation for the three funds based on the years remaining until the fund will be used to provide retirement income, somewhere around the year 2030.
The mutual fund companies do not charge any expenses above the included index fund fees to manage a target retirement fund. They offer investors a low-cost, one-stop way to invest retirement savings with a professional allocation among investment sectors. As an alternative, an investor could set up her own retirement plan portfolio by buying several index funds and managing the allocation based on the investor's investment outlook. A self-managed portfolio allows the addition of specialty funds, such as a gold fund or emerging market stock fund, to add potential earnings into the retirement savings.