But investors shouldn’t worry that the next plunge in commodities or other alternative investments will derail their retirement plans. Most companies that are adding them to target-date portfolios are doing so in small doses — typically 5 percent to 10 percent of a fund’s overall investments.
It’s important to know that adding alternative investments into target-date portfolios isn’t about beating the stock market. It’s about spreading risk across many types of assets and protecting against inflation. It’s in line with the target-date goal of building up savings over decades, and reducing the chance that a market decline will force an older investor to delay or scale back retirement plans.
The alternatives’ volatility makes them too risky for most individual investors because chances of a mistake — buying when prices are high, or selling when they’re low — are great. But their use in a broad, professionally managed portfolio “gives you an extra level of diversification,’’ says Wyatt Lee, a manager of target-date portfolios at T. Rowe Price, one of the companies expanding use of commodities.
Still, the use of these investments in target-date funds is relatively untested. The products, also known as lifecycle funds, originated 15 years ago, and now hold $341 billion in assets, according to Morningstar. They’re common in 401(k)s and other workplace savings plans.
Lynette DeWitt, a target-date fund researcher for industry consultant Financial Research Corp., is concerned about the addition of risk to the funds.
“What’s being billed as a risk protector is really a double-edged sword — these products are also risk creators,’’ DeWitt says.
Here’s a look at the alternative approaches companies have recently been taking with target-date funds:
■ Commodities. Fidelity’s Freedom 2050 fund — aimed at people now in their 20s and hoping to retire around midcentury — invests nearly 10 percent of its portfolio in another fund, Fidelity Series Commodity Strategy. Its holdings include oil, gold, soybeans and cocoa. That’s the highest investment in commodities by a target-date fund, according to a recent Morningstar study.
