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Investment Choices: Are Target Date Funds Good or Bad?

Investment Choices: Are Target Date Funds Good or Bad?

October 05, 2021

Target date funds are often found in retirement savings plans at your work. The description “target date” comes because these funds are described as designed for a specific time frame. Maybe for retirement, maybe for your child’s college; or for something else.

When You Consider “Target Date Funds” There Several Factors To Consider.

  • Inside retirement plans they can be a great choice, sometimes.
    • Often participants will start with zero balance and save a small amount each month. A target date fund includes a broad selection of investment classes that gives you diversification with every dollar you invest.
    • New investors may be worried about losing principal and the diversification of these funds reduces the chance that they will show a negative return in any given month. This makes it easier for retirement plan participants to keep adding and stay invested.
  • All funds should be screened for cost. Lower internal expenses (the costs of running the investment that are deducted from the fund) leave more returns.
    • Target date funds are typically a fund of funds. They include several investment funds inside the Target Date fund. In some cases, this means you pay the expenses of all the baby funds inside the parent fund.
    • The typical target date mutual fund has internal expenses of 0.37%. This is well below the historical average expense of 1%.
  • Understand the design of your target-date fund.
    • All target date funds use a mix of investments that changes each year as the target get closer.
      • Some funds are designed to be entirely in cash in the target year.
      • Other, retirement specific funds, are designed to be in a “prudent retirement portfolio” in the target year. This raise the question about what is prudent.

Bonds and Stocks

  • Different fund managers have different opinions about what is prudent to own at retirement.
    • Some target date funds are entirely in bonds in the target year.
    • Some target date funds are in a 60% stock to 40% bond mix in the target year.
  • Think about your actual goal.
    • If you know that this money is intended to pay for college tuition in 10 years. A target date fund that shifts toward cash in the target year would be a great choice.
    • If you plan to leave this job at age 60 but work for fun and not spend retirement savings for 10 years, then a target date fund this is intended to grow aggressively until you are aged 65 would be a great choice.
  • Remember that Target-Date Funds are a one size fits all solution. OK some of the time. Not always GREAT all the time.

You may find that thinking about target date funds has raised new questions about your investment goals. If you want to talk about it, I’m here to help. Follow this LINK to find a time for us to talk.

I’m an experienced and well-trained CERTIFIED FINANCIAL PLANNER™ professional so I’m always my clients’ advocate. And if you would like to meet other CFP® professionals near you, start your search here.

As you visit with financial planners, I suggest a couple things to check:

  • Is the advisor always the client’s advocate – a fiduciary advisor?
  • Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-first advisor.

These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.

A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.

Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.

If this article has you thinking about your own circumstances, contact my office at I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.