Money Management
The Good and Bad About Target Date Funds
If you are one of the millions of Americans who save for retirement by contributing to a 401(k) there’s a good chance you’ve at least heard of target date funds (TDFs). That’s because these funds have become one of the most popular investment options for 401(k)s or other retirement investing accounts. Like with any investment, TDFs come with their own set of positive and negative aspects that make it worth a closer look at what they offer.
What is a target date fund?
Before we can discuss the pros and cons of target date funds, you may be wondering what they are exactly. Simply put target date funds are designed to evolve your investments for you as your near retirement and are typically named with the year you plan on retiring in (within five to ten-year increments). For example a 35-year-old would likely be looking at a target date 2045 fund while a 25-year-old might want a 2055 fund. As you’d expect new TDFs are created as time goes on, allowing those joining the workforce to invest in the proper fund.
The good: They do the diversification work for you
The biggest reason that workers like using target date funds for their 401(k)s or other retirement accounts is because they are designed to meet your needs at each age. As you near retirement your fund will automatically shift from riskier investments, such as stocks, to more conservative ones like bonds. This saves you the hassle of strategizing and knowing when to manually move your money — a big plus for many amateur investors.
The bad: The fees may be higher than normal
Unfortunately in some case those automations and conveniences come at a price. While there are some companies that offer target date funds for with minimal fees, others can charge fees up to 1% for their services. Over time this can really cut into your savings so be sure to pay close attention to what you’re paying in management fees.
Mixed: You may not match your risk tolerance completely
Although TDFs are meant to be “one size fits all,” the reality is that they are not right for everyone. In fact some workers might find that target date funds either get too conservative too early for their taste or perhaps prove too risky for them overall. Luckily there is no rule that says you need to purchase the target date fund for the year you’re actually planning on retiring in, so more risk adverse investors may choose funds dated closer to the present while those with a higher tolerance can invest in funds dated further out. Alternatively you may find that neither plan suits you. If that’s the case you may want to forgo TDFs, electing to stick with more traditional funds and moving your money manually instead.
Target date funds have become a popular option for retirement savings because they don’t require a lot of work. To that end they succeed for investors who might not know much about markets or simply don’t want to manually make changes in the future. However, if you want to be more hands-on, you may want to consider adjusting that date of your TDF or going with a different type of investment altogether. Ultimately, if you have concerns, it’s best to speak to financial advisor about your options and whether TDFs are really right for you.
