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Two of the top three firms that offer these timed retirement funds are changing their asset allocations. It's a good sign that they haven't fallen asleep, but it doesn't mean investors can afford to be caught napping, either, writes MoneyShow's Howard R. Gold.

Target retirement funds have taken off in recent years. These "set it and forget it" funds, ideal for inexperienced investors, are mixtures of stocks, bonds, and other assets that supposedly get more conservative as they approach the target retirement year.

Assets in these funds have grown sevenfold since 2005, accounting for $485 billion at the end of 2012, according to Morningstar. The principal reason for such rapid growth was the 2006 Pension Protection Act, which installed them as default choices in many companies' retirement plans.

But the 2008-2009 market crash blindsided a lot of investors who hadn't read the fine print, as even target funds close to the retirement date lost 25% of their value — or more.

Now, two of the biggest fund companies are shaking up their offerings. T. Rowe Price (NASDAQ:TROW), the No. 3 purveyor with $74.8 billion in target-fund assets as of December 31, is rolling out an entirely new line of target funds with less invested in equities than its flagship Retirement series.

And Vanguard, No. 2 with $111.9 billion in target fund assets, has added a brand-new international bond fund to all its target funds, and eliminated longer-dated TIPs and money market funds from its 2010, 2015, and income-oriented funds.

Only No. 1 Fidelity, with $149.5 billion in target fund assets, is standing pat for now in its Freedom funds.

T. Rowe Price's changes are the most notable, a tacit acknowledgment that its existing target funds were too aggressive for more risk-averse clients. For instance, T. Rowe's Retirement 2015 fund has more than 60% of its holdings in equities, just two years before its investors leave the workforce.

But its new Target Retirement 2015 fund will have only 45.5% in stock and the rest in bonds, while Target Retirement 2020 will have 53% in equities — about 15 percentage points less than the existing one.

The new line, which will be an alternative but won't replace the existing ones, came from discussions with plan sponsors who wanted a more conservative product.

"There is a cohort of investors who have a different focus and objective," Jerome Clark, who manages T. Rowe Price's target funds, told me in an interview. "What we are trying to address is their desire for more principal certainty around retirement ... not retirement income."

That goes against the conventional wisdom among investment advisors for decades: load up on equities so you won't outlive your assets. With the new funds, you will be more likely to run out of money if you live to 90, God willing.

"You're going to see those success rates fall," portfolio manager Wyatt Lee told me. "They're not going to be dramatically lower, but they're going to be lower."

That's the trade-off.
NEXT: Vanguard Goes Big into International Bonds

Still, as Keynes said, in the long run we're all dead. Stocks can underperform badly for years, and if you retire when the stock market is in a bad mood? Well, tough.

Also, recent research by Lubos Pastor of the University of Chicago and others suggests that stocks may be riskier in the long term than we previously thought. His recommendation (and mine): invest less in equities — I'd recommend 40% to 50% in the years before retirement.

Vanguard said it's comfortable with its current equity allocation

— over 55% of its Target Retirement 2015 Fund and nearly 64% of its 2020 target fund. The Fidelity Freedom 2015 fund has 50% in stocks and the 2020 fund has 54%, although Fidelity's expense ratio is higher than Vanguard's, as is Price's.

Meanwhile, Vanguard is shaking up its funds in other ways. It has launched the long-anticipated Vanguard Total International Bond Index Fund (VTIBX) and matching ETF (NASDAQ:BNDX). And it will make international bonds 20% of the fixed-income portion of all target funds soon.

"This was the piece that was missing," said Catherine Gordon, a principal in the Vanguard Investment Strategy Group. She said it makes all Vanguard target funds, which already hold international stocks, "essentially a global portfolio."

It's also dumping long-term Treasury Inflation Protected Securities from some of its funds and replacing them with shorter-term TIPs, which, said Gordon, offer "protection against short-term inflation."

The short-term TIPs also will substitute for money market funds in the 2010 and 2015 target funds and the Retirement Income funds. Why? Because money market funds are returning nothing, and short-term TIPS at least have some inflation protection.

One big problem all these funds have is that once you retire, they shift big time into bonds. Bonds are supposed to tamp down the volatility of equities in investors' portfolios. But after a 32-year bull market, yields are rising again, and investors could face a rude awakening from their "safe" fixed-income holdings.

Vanguard expects bonds to "continue to act as a counter to stock volatility," but a recent paper by two of its researchers warned that "low yields from bonds and unchanged equity volatility will require investors to accept lower total returns and greater downside risk in their portfolios."

Target funds are a good idea, especially for younger investors, to build retirement wealth over time. That's why they could comprise half of all assets in 401ks and other defined-contribution plans by 2020.

Still, the mixture of too much in stock before retirement and too much in bonds afterwards can be toxic if you leave the workforce at just the wrong time.

So I'm glad to see some big fund companies shaking things up. But in target funds, as in all investing, there's no such thing as a free lunch.

Source: Target Funds Get A Big Shakeup