Target Date Funds-Right Investment for You?

In today’s investment environment, an investor can choose from numerous products. Mainly, you are just choosing to invest in stocks, bonds, and cash.  As you begin your investment selection process, you start by filtering through all the investment products available.  Once you do, chances are you will run across what is called a “target date fund”.  Target date funds are most common in 401(k) retirement plans and you probably have them in your company's plan.  So, what exactly is a target date fund and how is it different from other investment products?

At its core, a target date fund, is a mutual fund that strives to grow assets over a specific period of time. The goal of a target date fund is very similar to other mutual funds; however, they differ by taking into consideration your desired retirement age.  This is why target date funds have commonly been referred to as “age based” funds.  As an individual gets closer to their desired retirement age, the target date fund will adjust the investment portfolio accordingly.  Generally, the fund will become a more conservative portfolio, investing more in bonds and cash and less in stocks. It is important to note, target date funds usually vary by about 5 years (2010, 2015, 2020, 2025, etc.).  As of yet, there are not any target date funds for single years.

To better illustrate, here is an example. Let’s examine a “target date 2050” fund.  This fund has a 32-year time period to grow your assets before you may need them.  If you purchased it today, its allocation would be aggressive, with about 80% in stocks and 20% bonds.  In the subsequent years, as you approach 2050, the allocation will decrease the amount of stocks it owns and increase bond holdings.  By year 2050, the allocation may be as low as 40% stocks and 60% bonds, a far more conservative allocation than when it began. It is important to check the prospectus for exact details and specific investments of each target date fund.

The Pros
  • Simple. The biggest reason people choose target date funds is because they are simple. Often, investors find it difficult to research specific investments and build an allocation. A target date fund eliminates this problem. The portfolio of domestic and international stocks and bonds has already been selected for you.
  • Set and forget. Another advantage is target date funds automatically rebalance the portfolio for you.  Each year, the fund adjusts the allocation in stocks and bonds based on your age. You do not have to manually rebalance your portfolio as you get closer to retirement, the fund does it for you.
Although, these two items seem like “pros”, as investment advisors we believe your portfolio requires much more attention.

The Cons
  • Funds within the target date fund. Almost always, when you purchase a target date fund, you are investing in funds from the same mutual fund company.  While all mutual fund companies believe they have the best funds, this is rarely the case.  A fund company may have good value funds, but poor growth funds.  Or, it may perform better with its domestic funds, but have a substandard international fund.  The same is true for the bond funds. Not all will be the best performers. In a target date fund, you get the good with the bad.  And this will have an effect on your total performance. Again, perform your due diligence. It is important to fully understand if the target date fund meets your needs. Also, management fees are usually higher in target date funds. Make sure the fee is worth the value of the underlying funds within it.
  • Customization. Investing in a target date fund eliminates your ability to construct a portfolio based upon your financial situation. A target date fund assumes your risk tolerance based on your age. We believe other factors should be considered when determining you risk tolerance. These include income, short and long-term goals, contribution amounts, and ability to weather market volatility.
At Griffin Financial Advisors, we normally encounter target date funds when evaluating a client's 401(k) plan. More times than not, the plan offers better investments that fit their financial goals than the target date fund. This does not mean target dates funds may not be the best choice, but it is impossible to know until we review your plan. Let us help you examine the investments in your plan. With our guidance, you can make sure they are the best fit to reach your retirement goals.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.

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