Straight Talk

Are target-date funds a retirement bull's-eye?

Are target-date funds a retirement bull's-eye?
Are target-date funds a retirement bull's-eye?

A target-date fund is an investment strategy that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio, according to a selected time frame that is appropriate for a particular investor. It's structured to address some date in the future, such as year of retirement.

Like any other type of investment, returns are not guaranteed but depend on how the market performs.

Target-date funds are popular with 401(k) plan investors. Stacy Francis, certified financial planner and president and CEO of Francis Financial, details the pros and cons of target-date funds.

She points out that instead of having to choose a number of investments to create a portfolio that will help them reach their retirement goals, investors simply choose a single fund designed to help them reach that goal.

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The fund's managers then rebalance the fund's assets each year and keep its investments on track to meet the fund holder's goal of using that investment to begin paying for his or her retirement in a particular year.

This convenience to investors of putting their investing activities on autopilot in one fund is both a positive and negative, Francis said.

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The advantage of target-date funds is that they take the responsibility for rebalancing out of the investors' hands, she explained. However, this simplification may be a problem, as well.

"The investor is giving up all control of their investment," Francis said.

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The strategy makes a target-date fund a one-size-fits-all investment. It doesn't take into consideration the individual investor's current situation or risk tolerance. While target-date funds help make saving for retirement an easy process, they may be inherently too generic to meet the needs of some individual investors.

Francis stresses that investors should do some research on the front end, which will alert them to everything they need to know about fees, investment philosophy and asset mix. This will let you know whether a target-date fund investment makes sense and meets your retirement plan needs.