The Downfalls to Target Date Funds

Key Takeaways

  • Target date funds are a kind of “set it and forget it” way of investing for retirement.
  • This approach doesn’t take into consideration all the variables about an investor, outside of his/her age.
  • A better approach is to examine one’s specific circumstances when deciding how to invest.

In our society, we have certain expectations as to what age we’re supposed to start and stop various events. Generally, we enter kindergarten at age five, we graduate high school at 18, we retire at 65…but the reality is, these standards can vary quite a bit from person to person. What works for one person, may not work for the next.

When it comes to retirement savings, one popular approach is to use target date funds for 401(k)s. They’re an easy, “set it and forget it” way to invest, but they have some pretty big drawbacks.

First, they’re generic; they only take into account your age. Second, they may actually have more expenses associated with them than other approaches. Third, they don’t take into account your risk tolerance, meaning that your reward ratio may be way off. And fourth, there may be some investment mixes and categories that you’d prefer to avoid—there are international and domestic stocks, bonds, commodities, and real estate to consider.

What may be a better option is to take the time to examine your specific circumstances, taking into consideration your other assets to avoid being over weighted in any one area. From there, you can tailor your 401(k) to complement your retirement portfolio.

 

Target date funds are pretty odd. It’s difficult to think ahead decades in the future and just set your course based on what everyone else your age is doing. Better to figure out a plan that’s suited to you, and you’ll be better served in the future, finding that you’re building your wealth successfully along the way. Until next time, enjoy.

Gary

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