Financial Opinion and Insights

Are Target-Date Funds The Answer?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Not likely.   Like most easy answers, this is one that’s full of flaws – as you can tell, I’m not much of a fan.

All you have to do is ask yourself some simple, straightforward, common-sense questions, and you can see the answer for yourself.

  • Does everyone born in 1950 plan to retire at the same age?
  • Do they have the same plans for retirement?
  • Will they all need the same income 
  • Will they have the same health issues?   Will they have the same number of `boomerang kids’ that come back to live with them?  Will they want to/have to help with the education expenses for grandchildren?
  • Will they all be taking care of the same number of elderly parents?  For how long?
  • Should every investor who is the same age have the same asset allocation?
  • Should every investor have the same underlying investments.

Target-date funds are simply a new twist on the old balanced funds that have been marketed for years. They’re supposed to be `balanced’ between stocks and bonds; but what’s the mix?  Are all balanced funds alike? What are their holdings? 

Most important, what are their expenses?  When you match their performance against blended benchmarks, the expense issue becomes clear.

An article in the December 2011 issue of Investment Advisor noted that in 2008 – the year of the market meltdown – 50 to 60% of the target-date funds maturing in 2010 were at least 35% invested in equities. Was that exposure right for everyone in that fund?  Did they all have the same income requirements the first year of retirement?

My problem with these funds is that the one-size-fits-all `easy’ solution makes it too easy for investors to put their retirement on `auto-pilot’ and live in ignorant bliss.    Unfortunately, too few take a goal-driven approach and update their needs, at least annually.

As is usually the case, the right answer is seldom the easy one.



Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

December 6, 2011 at 8:05 am