Pimco and Invesco Try to Build a Better Retirement Fund

Target-date funds were designed to be a simple choice for retirement savers who don’t want to devise their own investment strategies or adjust them over time. The funds typically hold mostly stocks when an investor is younger, then shift to more conservative assets, such as bonds, as retirement approaches. In the financial meltdown of 2008, when stocks and bonds suffered sharp declines, that recipe didn’t offer much protection. Some target-date funds designed for those close to retirement lost as much as 41 percent that year while the Standard & Poor’s 500-stock index fell about 38 percent, according to Morningstar.

To address that problem, Invesco and Pacific Investment Management are adding derivatives and unconventional assets to their target funds. While the approach may cushion the funds in down markets, the strategy adds expenses and makes the funds harder to analyze for investors and employers who offer them in 401(k) plans. “Managers are looking to deliver strong returns with less volatility, and that’s why they’re looking to diversify” their investments, says Laura Lutton, an editorial director in the fund research group at Morningstar.