Broker Check
Target Date Funds – A Good Idea or Not?

Target Date Funds – A Good Idea or Not?

September 14, 2020

Most of my clients have target date funds available to them in their 401ks and TSPs.  If you are not familiar with Target Date Funds, they act a lot like their name.  They are mutual fund strategies that target a date of use – either retirement or some other goal.  The further you are from the goal, the more aggressive the investment.  As you close in on retirement or any other goal, they become more conservative and hopefully protect you from sharp market downturns. 

Target date funds are investing made simple.  You commonly see them in 401ks to help plan participants avoid analysis paralysis.  Not sure what fund to pick?  Well if you think that you will retire in 2035, then you should consider picking the 2035 fund.  They give you professionally managed portfolios that adjust to changes in the market and your time horizons without you having to lift a finger or read all the latest financial news. 

So why wouldn’t someone love this approach?  The problem is that risk means different things to different people – and different companies!  The first step to investing is always to determine the level of risk that you are willing to take.  After that, you select investments that meet your risk tolerance and time horizon.  The problem comes in the fact that the risk level taken in a fund – for example, a 2035 fund- is not the same at all fund companies.  T. Rowe Price portfolios can potentially be more aggressive than Fidelity portfolios, Fidelity portfolios can be more aggressive than BlackRock portfolios, BlackRock can be more aggressive than the TSP Lifecycle funds.  There really is no standard.  So, if you are not invested at the proper risk tolerance, you may find yourself selling at the absolutely worst time when the market is falling or you may find yourself lagging behind where you think you should be when the market is going up.

So what should you do?  I recommend that my clients first complete a risk assessment.  After they have completed the risk assessment, we compare the risk level they are willing to take to the target date funds available in their 401k.  From there, they can make an educated choice that aligns the fund and their personal risk tolerance.  Then, we take a look at it again on an annual basis to make sure that it is still meeting their needs.

Conclusion: Target date funds can be a good option, but like all investing, you need to put in a little leg work to make sure that you are really getting what you want.

Mutual funds are offered by prospectus only.  Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.