Retirement Advisor

Target Date Retirement Funds

Most target-date fund managers won’t even invest in their own funds.
Should you?

Making investment decisions for retirement can be a daunting exercise for most people.  Future retirees will need to make a variety of choices, including how to balance the desire to increase their investment returns vs. the risk of losing money.
That being said, future retirees must also keep in mind that inflation may reduce the purchasing power of retirement savings and a spouse or partner may live longer in retirement than expected.  Realizing these facts, a number of mutual fund companies who participate in 401K plans offer “target date retirement funds,” sometimes referred to as “target date funds” or “lifecycle funds.”

Target date funds, which are usually mutual funds, hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to the fund’s investment strategy. Target date funds are designed to be long-term investments for individuals with particular retirement dates in mind. The name of the fund often refers to its target date. For example, you might see funds with names like “Portfolio 2030,” “Retirement Fund 2030,” or “Target 2030″ that are designed for individuals who intend to retire in or near the year 2030.  Most target date funds are designed so that the fund’s mix of investments will automatically change to become more conservative as you approach the target date. Typically, the funds shift over time from a mix with mostly stock investments in the beginning to a mix weighted more toward bonds.

Most Target-Date Fund Managers Won’t Even Invest In Their Own Funds!!
Morningstar recently reported the stunning fact that “…only three (target-date mutual fund) managers invest more than $1 million of their personal assets in the target-date mutual funds of the series they manage. More than half of the industry’s target-date series are run by mutual fund managers who have made no investments in the target-date funds they oversee”.
Ponder that statistic for a moment. If the majority of fund management won’t even invest in their own target-date retirement funds….why should you?

read more: The Drawbacks Of Target Date Mutual Funds

Target date funds are becoming a staple option through employer sponsored 401K plans. More and more 401K plans use these funds as the default investment for plan participants who have not selected their investments under the plan.  Once you select a target date fund, the managers of the fund make all the decisions about asset allocation.

"...Their Returns May Be Very Disappointing"

“Target-date funds don’t necessarily mirror the performance of the larger stock and bond markets. Instead, their returns depend on the mix of their individual portfolios, and in some years, their returns may be very disappointing.”   –

Evaluating a Target Date Retirement Fund

As with any investment, evaluate a target date fund carefully before investing. The target date may be a useful starting point in selecting a fund, but you should not rely solely on the date when choosing a fund or deciding to remain invested in one.  You should consider the fund’s asset allocation over the whole life of the fund and at its most conservative investment mix, as well as the fund’s risk level, performance, and fees.  This information is available in the fund’s prospectus.

As noted above, funds with the same target date may have different investment strategies and levels of risk.  These variations may occur before the target date, and also at the target date and after it.  Some target date funds may not reach their most conservative investment mix until 20 or 30 years after the target date, as shown in Example 1 below.  Others may reach their most conservative investment mix at the target date or soon after.

For The Fiscally Apathetic

Target-date retirement funds tend to be pretty conservative in nature. These funds were designed not so much to make you rich as to keep your investments relatively safe.
Comfortable, but too cautious for many younger investors especially.  It is basically the “set it & forget it” retirement investment choice for the fiscally apathetic.

Target date funds also may have different investment results and may charge different fees, even with the same target date.  Often a target date fund invests in other mutual funds, and fees may be charged by both the target date fund and the other funds.  Keep in mind that a fund with high costs must perform better than a low-cost fund to generate the same returns for you.  Even small differences in fees can translate into large differences in returns over time.

You should also consider how a target date fund fits in with your other investments.  If you have other stock, bond, or mutual fund investments, you should carefully examine your overall asset allocation.

In summary, before investing in a target date fund:

  • Consider your investment style.  Do you want to play an active role in managing your investments, or do you prefer the more hands-off approach of a target date fund?  Keep in mind, however, that even with a target date fund, it is important to monitor the fund’s investments over time.
  • Look at the fund’s prospectus to see where the fund will invest your money.  Do you understand the strategy and risks of the fund, or of any underlying mutual funds held as investments?
  • Understand how the investments will change over time.  Are you comfortable with the fund’s investment mix over time? In particular, make sure you understand when the fund will reach its most conservative investment mix and whether that will occur at or after the target date. Does your level of risk tolerance match how aggressive or conservative it is?
  • Take into account when you will access the money in the fund.  How does the fund’s investment mix at the target date and thereafter fit with your plans for the future, whether they are to withdraw your money at retirement, or to continue to invest?
  • Examine the fund’s fees.  Do you understand the costs for both the target date fund and for any mutual funds in which the target date fund invests?
  • Consult a financial advisor.  Don’t fall into the trap of selecting the easy fund choice. Research Financial Advisors can help you select the proper investments to guide you towards a successful retirement.

Both before and after investing in a target date fund, consider carefully whether the fund is right for you. It might not be.

So, should you invest in your employer’s 401K account if you’re confused and looking for help with your retirement?
Consulting with a professional investment advisor at Research Financial Strategies will help you to make important 401K decisions.  
Research Financial Strategies offers ongoing management (401K advisor) of your employer 401K or government TSP.
Our years of experience will help navigate your 401K toward your retirement goals.
Contact us for a 401K 2nd opinion

read more:  The drawbacks of target-date mutual funds