A Target Date fund is a type of investment, usually a mutual fund, that is designed to provide a simple investment solution through a portfolio in which the investing strategies become more conservative as the target date (usually retirement) approaches.
Target Date funds have become increasingly popular with 401(k) plan investors and managers.
While many people appreciate the convenience of putting their investments on “autopilot”, others don’t like the feeling of a “one-size-fits-all” investment fund.
Get To Know the Fund You’re Considering
Before you buy a target-date fund, be sure to study up on what exactly the fund offers. Take a close look at which securities the fund owns and how the fund’s managers make decisions.
According to Forbes.com,
“There can be significant differences in the riskiness of funds offered by even the big three target-date vendors–Fidelity ($109 billion of target-date fund assets under management), Vanguard ($67 billion) and T. Rowe Price ($48 billion).”
The best Target Date fund depends on your ability to handle risk and your view of the markets. If, as some stock market analysts claim, the bond market might be the next bursting bubble, it may turn out that more conservative Target Date funds will get hit harder.
Keep Your Eye on the Fees
Convenience may be a great attribute of Target Date funds, but they’re not necessarily the cheapest option. When shopping for the perfect fund, make sure to compare everything from maintenance and managing fees to the cost of withdrawals.
Like today’s designer mixed breed dogs, customization of Target Date funds appears to be a costly process. For example, The Fidelity Freedom 2030 Fund charges 0.79% a year, which is more than four times what Vanguard’s 2030 fund charges (0.19%).
When you allow these seemingly small differences to grow over several years, they can have large effects on your returns. Whatever your decision, make sure to arm yourself with as much of the cost information as you can.
One advantage of Target Date funds is that they don’t require the owner of the fund to re-balance their portfolio when higher-than-assumed gains or losses occur. As anyone who has ever had any experience with mutual funds can tell you, even if investors do an amazing job of selecting the best funds initially, it’s unlikely they’re going to review and re-balance them every quarter with the same success.
One of the hardest parts of correctly balancing and re-balancing your portfolio is when you decide to sell what’s doing well so that you don’t become over-invested in one particular asset. This is hard for some investors because people usually want to hold on to what’s doing well and dump the poor performers.
Many people depend on Target Date funds to make some of the harder investing decisions for them, while always keeping the target date squarely in sight.