Should You Rely on “Target” Funds for Your Retirement?

by Miranda Marquit · 6 comments

Bulls eye

In recent years, a “set it and forget it” approach to long-term investing has become increasingly popular. One of the ways this trend manifests itself is through “target date” retirement funds.

Target date funds are designed to automatically adjust as you get closer to retirement age. Your asset allocation is shifted from an emphasis on stocks to an emphasis on bonds as you approach your target date. It’s all supposed to happen seamlessly so that you don’t have to worry about it. Just keep investing, and your portfolio will take care of itself.

But should you rely on target funds for your retirement?

Problems with Returns

One of the issues with target date funds is that you might not be able to plan for huge market events. Some target date funds still haven’t fully recovered from the stock market crash of a few years ago. What happens when a stock crash happens just before your target fund starts moving your assets into bonds? You could end up “locking in” those stock losses as you end up in more conservative investments, which won’t offer you the chance to recover the losses.

In order to deal with this issue, you might need to switch to a fund with a target date that’s further out, or you might need to look for other ways to recoup some of the losses. The problem with relying on an automatic formula is that you so often see automatic responses — no matter what’s going on in the world outside.

Don’t Get Lazy

Another issue is that target date funds, and other automatic type plans, tend to encourage a certain amount of laziness on the part of investors. While you don’t want to get involved in too much active trading (the fees can start to add up and cut into your returns), you also don’t want to just forget about your investments.

Sometimes, it’s a good idea to check in on your asset allocation, and consider selling mutual funds, or other investments, that aren’t helping you reach your retirement goals. Obsession’s not good, but neither is ignorance.

Target date funds tend to get you thinking that it’s all “taken care of,” when it might not be.

Before you decide to invest in a target date fund, figure out what type of management it undergoes. Additionally, be prepared to check up on the fund. You want to see how things progress throughout your milestones. That way, if you need to make adjustments (like picking a longer target date), or if you decide that you’d be better served by doing something else with your money, you can make the move before it’s too late.

It’s important to pay attention to what’s happening with your portfolio. A target date fund may help take some of the pressure off, but it doesn’t relieve you of the responsibility of doing your own research.

Do you have a target date retirement fund?

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{ 6 comments… read them below or add one }

Ginger January 29, 2013 at 7:29 am

I have a target date fund, and I recommend most people to get them because they require less money to diversify. It will take me $24000 to be diversified and not in target date funds, and since I have under $14,000 that does not work for me. I think that as you get more money, you should move out of target date funds. On the other hand, my mother was in all stocks five years from retirement because she never looked at them. If you know the person won’t take care of their retirement, it might be better for them to have a target date fund than a static fund.

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Mario February 3, 2013 at 10:42 pm

Why would it take you that much to diversify? Index funds are as diverse as you can get and there are plenty with low minimums and low fees

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Ken Faulkenberry - Arbor Investment Planner January 29, 2013 at 11:45 am

Target date funds have been a disaster. They typically carry higher fees which eat into returns. All you have to do is look at their less than mediocre returns to know they are not the best investment vehicle. The only people who should invest in target funds are those that want to put zero effort into their retirement investment planning. Thanks for warning your readers Miranda!

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AJ January 31, 2013 at 7:41 am

Everything depends on the fund; what is the management; what are the fees; what is the past performance. Just like any fund, each needs to be compared to mutual funds available.

Does any know of a website comparing mutual funds along with major target 401k plans?

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Fred January 31, 2013 at 6:42 pm

I love Target Date funds. I have all of my SIMPLE money–about $350k– in one at Vanguard. Fees are low .17% annual, so I don’t know what one commenter is talking about. I have another $1.5 mill in 3 Vanguard broad index funds—ETF’s actually– that I use to mimic a Target Retirement Fund—fees are .12% annual combined for all of those together. One of the problems with the comments of the author of this story is that she espouses TIMING the market and we all know that trying to time the market is a fool’s errand. I re-balance my 3 ETF’s quarterly. I keep another $1.3 million in cash and individual stocks. The cash is so I can buy more ETF’s in a correction. The stocks are an individual portfolio I manage myself. It’s very very time consuming and to be honest, I didn’t even beat my Vanguard index funds last year. I came close, but no cigar.

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Steve B February 1, 2013 at 10:27 am

While I love all the discussion of the behavioral aspects of personal finance on this blog, often commenters seem naive and a little too simplistic about retirement planning. Income planning, tax planning, business succession planning, and estate planning (or any lack thereof) can all have dramatic effects on your standard of living and the value of your retirement portfolio and legacy, particularly for business owners and high net worth individuals. Financial planners’ compensation can be fee-based or commission-based. I recommend interviewing several and hearing their thoughts in the above topics. Look for someone who specializes in complex retirement planning but speaks in common terms. They should already have collaborative associations with accountants, tax professionals, and estate attorneys. They should discuss topics like long-term care insurance, annuities, and tiered asset allocation models to grow long-term money while protecting short-term funds.

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