Many Target-Date Funds Use Junk Bonds

Many target-date retirement funds are still heavily invested in risky, high-yield junk bonds in order to give investors the yields they promise, Bloomberg reports.

Six of the top nine target-date fund providers contain high-yield corporate bonds in their 2010 portfolios as of September, according to Morningstar Inc.

John Hancock’s Lifecycle 2010 fund had 35% invested in below-investment-grade bonds, followed by Principal Funds’ LifeTime 2010 Fund, with 21%; the Fidelity Freedom 2010 Fund, with 17.1%; T. Rowe Price’s Retirement 2010 Fund, 13.1%; American Funds’ American 2010 Target Date Retirement Fund, 11.4% and TIAA-CREF’s Lifecycle 2010 Fund, with 6.6%.

“People are uninformed of the massive amount of risk they’re undertaking,” said Tim Wood, a Portland, Oregon-based retirement plan fiduciary. “Participants accept that someone has gone through these things and they’re reasonable.”

Vanguard Group Inc., Wells Fargo & Co. and ING Groep NV don’t have any junk bonds in their 2010 or 2015 target-date funds.

“I am extremely disturbed by the amount of junk bonds found in many 2010 target-date funds,” said Sen. Herb Kohl, D-Wis., and chairman of the Senate Special Committee on Aging. “Stronger regulation is needed to ensure that participants on the brink of retirement are not exposed to such excessive risk.”