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Target Date Retirement Funds: Pros and Cons

By: Staff

Last Updated: August 18, 2017

The target date mutual fund is a new investment tool that has emerged within the last decade, designed to help investors make sense of the jumble of funds offered by their retirement plans. These new choices are known as target date funds (TDF), and chances are your 401(k) or 403(b) plan contains at least one of these unique investment vehicles. Target date funds are typically named for the year you plan to retire, i.e., Target Date 2020, Target Date 2030 and so on.

Set It and Forget It

The idea is that these funds will change their mix of stocks and bonds as time goes on, helping younger investors capture more of the stock market's historically high returns while shielding older workers from a potentially catastrophic bear market. The actual track record of these funds has been somewhat of a hit or miss affair, so it is important for workers to research the funds they are offered thoroughly before investing.

Good Choice for Hands Off Investors

Some workers love nothing more than tracking their investments on a daily basis, while others would rather have a root canal than read the financial section of the newspaper. If you fall into the latter category, it may make sense to invest at least some of your retirement money in a target date fund. The managers of these funds make all the investment decisions for you, from the proper mix of stocks and bonds for your age to which stocks and bonds to buy.

Problems with the One-Size Fits All Approach

One of the potential downsides of these target date retirement funds is that they by necessity take a one-size fits all approach to investing. In order to do their job the fund managers who oversee these mutual funds need to assume that every 40 year old has the same needs, and that every 60 year old pre-retiree will need the same type of portfolio. The problem is that the reality is rarely that simple - every investor will have different needs and a different tolerance for risk. Investors who dislike the cookie cutter approach to planning for retirement may be more comfortable investing on their own.

In addition, some target date retirement funds charge fees that are higher than the industry average, so it is important for workers to read the fund prospectus carefully before making a commitment. High fees can easily eat into investment returns, especially over the 20 or 30 years that these funds may be invested. Target date retirement funds can be a good choice for some investors, but it is still important for every investor to due plenty of homework.

Your 401(k) May Already Include These Funds

Assets held in target-date funds, also called life-cycle or age-based funds, crossed the $500 billion threshold in 2013, according to fund tracker Morningstar. Demand for such products, especially among 401(k) plan participants, shows no signs of slowing, according to financial experts.

Which Funds Should I Choose?

For more information, you can talk to your investment plan advisor to see what programs your investment plan offers and see if these funds are a good option for you.