Last year saw better returns for bonds than for stocks on average—and that shaped the comparative performance of target-date funds for retirement.
Funds geared to recent retirees or older workers, because of their bigger bond holdings, generally did better than the stock-heavy funds for younger workers. (According to Morningstar, the average U.S.-stock fund returned a negative 2.4% in 2011, while international-stock funds lost 13.3% and taxable-bond funds had a positive 4.6% return.)
Among various companies' target-date lineups, some of the strongest returns came from Invesco's Balanced-Risk Retirement series. Those funds hold more bonds than most peers in an effort to equalize risks taken in stocks, bonds and commodities.
What happens to these older workers and retirees when interest rates start increasing and bonds start getting killed? Go back to work, drastically cut expenses, etc. Target date funds that change allocations by age make no sense and are dangerous. Older people run this risk of not making enough and younger people are taking way to much risk during market declines. Allocations should be based on market dynamics, not age.