Are Target Date funds OK?

Lifecycle, all-in-one, and “set-it and forget-it” are all common names for Target Date funds (an investment vehicle usually comprised of a fund of funds invested in stocks, bonds, and cash, whose percentages of each dynamically vary as you approach your intended retirement age). When investing in these Target Date funds, an investor typically chooses the fund with the name closest to the date they plan to retire. For example, if you are a 45 year old and plan to retire at 65, you would choose a Target Date fund with a date close to 20 years in the future.

The fact that these funds provide immediate diversification, semi-appropriate risk allocation, and automatic rebalancing, hearkens to their allure. And investors are putting their money where there desires lay because Target Date fund assets have been increasing rapidly the past ten years. It is hard to say if this is due to the fact that Target Date funds became a Qualified Default Investment Alternative within 401k plans in 2006 for plan fiduciaries, or do investors really crave the simplicity of “set-it and forget-it”? It’s probably a little bit of both.

But back to the question. Are Target Date funds OK? Simply put, YES.

Are Target Date funds infallible, no; but, do their diversification, risk allocation, and rebalancing go a long way to serving a disinterested investor well, YES.

Since you may be considering a Target Date fund if you are reading this post, here are two (2) things to consider when choosing your Target Date fund:

1. Low fees - look for expense ratios/fees below 0.25% or 25 basis points; expense ratios or fees charged by your Target Date fund are insidious headwinds to the overall return of your portfolio, reduce these fees and watch your money grow

2. Glide path - this is the funds gradual shift to a more conservative investment allocation as you approach retirement, e.g., as you approach retirement, most funds dynamically transition to a higher percentage of bonds and cash while reducing the funds stock percentage; a funds glide path is generally designed to reduce investment risk as you approach retirement.

For more information on figuring out if a target date fund is right for you - click here to see an article by Forbes.

If you have questions about whether a Target Date fund is right for you or about your 401k investment options, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.