Target Date Funds – A Dangerous Retirement Blunder

A dangerous new trend is emerging for retirement investors: The use of Target-date mutual funds.

Assets in this sector have soared in recent years. Topping well over $1 trillion dollars and rising. CNBC calls this trend “One of the biggest — and often costliest — retirement mistakes investors are making today”

  • Fidelity and Vanguard both recently reported that in 2017 over 50% of investors in 401k plans put all their money in a single target-date fund. According to their findings, both feel that “This hands-off approach can backfire by failing to account for factors such as life expectancy, risk, income changes or loss of a spouse.

Why have these investments become all the rage lately among retirement investors? Primarily- laziness. By making one simple choice it appears easy to feel like you are creating a retirement plan with one click to spread your investment dollars among stocks and bonds and to rebalance as conditions change. 

Target-date funds provide a false sense of security. Naturally stocks could easily decline just as easy as bonds would in target-date funds but, as interest rates continue to rise — a dangerous and troubling situation for a retiree needing income arises.

The biggest misnomer is that TDF’s are designed for the so called “average investor”. However, very few investors are truly average and no one wants a one size fits all investment approach within their retirement master plan. Quite often the fees in these funds are very high and they do not achieve their objective. During market downturns and crashes, many of these type of funds suffer just as much as other funds, even though they are sold as safer alternatives.  

After all, who would think that everyone retiring in a given year has the same investment objectives, risk tolerance, income needs and time horizon and therefore have the same asset mix? Let me answer that for you – no one!

According to Alexander S. Lowry, director of the master’s program in financial analysis at Gordon College in Wenham, Massachusetts: “Outsourcing that responsibility to a target-date fund is a recipe for disaster, at least in the current investing climate. Once people begin using a target-date fund, they go on autopilot and stop thinking about their investing [strategy].”

“So they don’t consider the market cycle, whether their risk profile has changed, what the impact will be on other assets, etc. For example, we’re in the final inning of a historic bull market and at some point in the not-too-distant future, we’ll be at the bottom of an awful bear market. These two points in time require a very different investment approach but a TD fund approach doesn’t consider this.”

The bottom line is that investing in a target-date fund is the epitome buy-and-hold, more like buy-and-hope…and hope is not an investment strategy!

Any successful retirement starts with creating a Retirement Master Plan that includes:

  1. A retirement income analysis – so you never run out of money in retirement.
  2. A forward-looking investment tax-strategy – You have more control of your taxes in retirement than at any point in your life.
  3. Hands on “tactical” asset management that constantly adjusts your portfolio – the opposite of buy-and-hold.
  4. An asset protection strategy that will protect your nest-egg: not IF but WHEN the market crashes again.  

These are just some of the things we do for our clients every day.

We firmly believe investors need to be educated and protected. To get your own free retirement income and tax-strategy analysis, simply give us a call or reply back and we will create a complimentary retirement master plan, customized for you and your family.



Smart Money Newsletter

Written By: Keith Springer

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