Target-Date Funds: Easy Isn’t Always Good


Target-date funds may seem like the easy way to invest for retirement, but this hands-off method of investing might not be the best for you.

For many, they’re convenient, named simply for the decade when an investor expects to retire and they change over time based on risk levels considered appropriate for your age. For instance, investors who are currently 25 and want to retire at 65 might choose a 2050 target date fund.

You decide how much of your paycheck you want to save in your employer-sponsored 401(k), for example, and a target-date fund manager automatically changes your investment mix over time, the Department of Labor and the Securities and Exchange Commission explained in a recent investor bulletin.

Your money will initially go into riskier investments like stocks and as you get closer to retirement, the money will be moved to more conservative, safer investments like bonds.

Depending on your personality, however, you might be better off choosing other funds on your own, including index funds, large-cap funds that invest in big companies, mid-cap funds, bond funds and others depending on your own preference.

“Target date funds, even if they share the same target date, for example 2030, may have very different strategies and risks,” according to the government agencies.

What Target Date Funds Are Not

Employers may trust target-date funds enough to make them the default investment for their employees, but target-date investing can’t promise great returns, or any returns at all for that matter, the government agencies say.

For instance, while they should have been fairly conservatively invested, funds with the target date of 2010 lost almost 24% in 2008 and between 7% and 31% in 2009, according to the SEC.

Probably the worst performing 2010 target date fund in 2008, the Oppenheimer Transition 2010, lost 41% that year, noted The Boston Globe last year. But that may have been largely because its 20% investment in a conservative bond fund turned out to be a bad idea as well. Oppenheimer’s Core Bond fund plummeted by 36% during the height of the recession, the Globe reported.

And just because several funds have the same target-date doesn’t mean they’re invested the same way, notes the SEC.

Even if your target-date fund does perform well, they may not make you as much money as you might hope. In part, that’s because saving while you’re young gives you more time for your money to grow, but it’s often difficult to put away a lot of money – ideally 10% of your income according to Motley Fool – when you’re in an entry-level job.

People often don’t put a sufficient amount of money into retirement until they are in their 50s, but by that time, they are too close to retirement age to take on much risk, says Motley Fool. Plus, any modest gains made by savers in the 50s or older are dampened by the fees charged by fund managers.

Plus, with about 40% of Americans pulling money out of their savings and retirement accounts, often the growth potential is no longer there, Motley Fool notes.

When Target-Date Funds Miss the Mark

If you’re concerned about the high level of risk a target-date fund takes, for example if it allocates 95% of your money to risky stocks and only 5% to safer bets like bonds and cash, it may not be for you.

On the other hand, if a fund isn’t risky enough for you, leading you to think you might be missing out on the higher returns a riskier investments might get you, a target-date fund might be wrong for you as well.

A target-date fund shouldn’t be a no-brainer; just because you’re young doesn’t mean you necessarily want to take a lot of risk, and simply because you’re close to retirement doesn’t mean safe is your best bet.

If you want more control over where your money goes, you want your asset allocations to remain the same over time or you have other concerns about a target-date fund’s management of risk or excessive fees following worrisome investigations, as The New York Times reports, you may want to decide on your own what kind of fund your money goes into, for instance by doing a bit of research at sites like and regularly analyzing your retirement account to decide whether to reallocate your assets based on any changes in the amount of risk you’re willing to tolerate.

And socially responsible investors who don’t want to put their money into companies that pollute the environment or help fund Big Oil, might want to opt specifically for a socially responsible fund.

Another Easy Option

If you do have decades ahead of you to invest and you decide that you’d rather stick to the easy way, which doesn't require a ton of research on your own, however, s target-date fund may work for you. If you simply want more or less risk than what fund managers consider the best for your age, there is another way to work the system.

“Even if you plan to retire in 2030, you may decide, based on your investment objectives, tolerance for risk, and other assets, that a 2020, 2040, or other target-date fund is more appropriate for you,” according to the Department of Labor and the Securities Exchange Commission.

Show Comments

Back to Top