Investors learned the hard way in 2008 that target-date funds don’t necessarily protect them when the market crashes – not even funds that are marketed to people close to retirement age. Now it turns out these products also don’t solve another common 401(k) problem: taking the money out too soon.

Target-date funds are funds of funds that automatically adjust their asset allocation to track the investor’s age and declared retirement date. Supposedly, they ensure that unsophisticated participants follow a sensible asset allocation that will make their money last.

Thus, older 401(k) participants assumed that a “2010” fund – aimed at sixty-somethings who planned to retire around that year – would be conservatively invested almost entirely in bonds. Boy, were they shocked when they found that these funds were typically half in stocks and fell an average of 24.6 percent in 2008, according to Morningstar. (Some funds with later due dates also underperformed the markets but weren’t as much of a shocker because they were expected to be more in equities.) ....

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