Target-date funds are all the rage among retirement investors, making it easy to spread money among stocks and bonds and to rebalance as conditions change. Total assets in this sector topped $1.1 trillion at the end of 2017, up from $158 billion at the end of 2008, according to Morningstar.
But is this too much of a good thing?
Vanguard Group, the fund giant, reported recently that 51 percent of investors in 401(k) plans with the firm put all their money into a single target-date fund in 2017, and Fidelity Investments has similar figures.
But some experts warn that this hands-off approach can backfire by failing to account for factors like the investors’ life expectancy, risk tolerance, income changes or loss of a spouse.
Target-date funds are designed for the average investor, but few investors are truly average, and many advisors say those with heavy stakes in TD funds are wise to adjust to suit their personal needs.
“Although they have substantial benefits, target-date funds ultimately provide too much of a cookie-cutter approach to asset allocation,” said Benjamin Sullivan, a planner and portfolio manager with Palisades Hudson Financial Group in Austin, Texas.
“Not everyone retiring in a given year has the same risk tolerance, cash-flow needs and time horizon. Therefore, not everyone in a cohort should have the same asset mix.”
“People need to be conscious and engaged with their investment,” said Alexander S. Lowry, director of the master’s program in financial analysis at Gordon College in Wenham, Massachusetts.
“Outsourcing that responsibility to a target-date fund is a recipe for disaster, at least in the current investing climate.”