Target Date Funds Hit Bullseye

Target date funds have emerged as a staple in many workers’ 401(k) plans.  The funds, whose assets automatically shift into more conservative investments as individuals approach retirement, offer sophisticated and diversified exposure to Wall Street with almost no effort by the investor. 

“Most investors tend to be hands-off.  If you aren’t willing to do the research of individual stocks or individual mutual funds and rebalance your portfolio once a year, target-date funds are a good ‘set-it-and-forget-it’ investment.” 

For new investors, target-date funds are a great option.  “They are a great investment vehicle for investors who are just getting started and need broad diversification.” 

However, the funds are not problem free.  One of the largest complications can be decades down the road. When you have outside assets from an inheritance or IRA you may not know your overall allocation.  Hence, you must adjust assets as necessary to match the fund’s stated goal of its aggressive/conservative mix. 

Another problem lies in the fact that target-date fund fees are higher than many other professionally managed mutual funds.  Higher fees mean more money taken from the account, translating into lower returns on investments. 

See Sarah O’Brien, More Advisors, Investors Setting Sights on Target-Date Funds, CNBC, Sept. 8, 2014.