Are Target Date Funds a Good Choice?

5 WAYS TARGET-DATE FUNDS MISS THE MARK Considering how complex investing can be, it's no surprise we are being pitched "set it and forget it" solutions. The search for simplicity can lead investors to target-date funds (also called "lifecycle funds"). While they seem to offer a hands-off solution for investors who aren't sure how to allocate their assets or aren't aware of online services that make it easy for them to do so, target-date funds can suffer from critical limitations that investors should consider. Today, we explore five overlooked flaws in target-date funds, which could make them a less-than-ideal investment. WHY TARGET-DATE FUNDS SOMETIMES FAIL TO DELIVER Limitation #1: Limitation #2: One Size Does Not Fit All Loss of Control Over Portfolio Target-date funds group investors together using broad Investment experts agree that asset allocation influences return homogeneous characteristics like age. For example, they treat the more than any other factor. But if you have other accounts in addition to your target-date fund, as most do, it will be hard to parents of 8 year old Jerry saving for college, the same as the parents of 8 year old Steve. Why is that a problem? maintain an asset allocation. ASSET ALLOCATION CHART 8-YEAR OLD JERRY 8-YEAR OLD STEVE has $30,000 saved for college. has no savings. The parents of Jerry can afford to invest in a higher risk portfolio, but target Worse yet, target-date funds operate according to inflexible "glide paths" date funds will treat both parents risk tolerance exactly the same. (formulas that adjust your asset allocation over time) that cannot be changed for any reason. Limitation #3: General Over-Exposure to Stocks Limitation #4: LIMITATION #5: Conflicts of Interest ADDED FEES Unlike index funds, which simply use Many investors fail to realize that A key selling point behind target-date funds is that as you near retirement age, the vast majority of your money is moved into safer computer algorithms to mimic major indexes like the S&P 500, target-date funds are actively managed, which means higher fees for investors. target-date funds are collections of other funds-and that target-date funds often have higher fees than the underlying asset classes such as bonds. funds they hold. %24 Yet, as of 2010, target-date funds at maturity still sat at 43 percent stocks. %24 43% %24 %24 24 %24 This suggests that a truly diversified, Additionally, this creates an incentive for fund The takeaway: Investors with asset allocation retirement-friendly portfolio might be best managers to "stuff" target-date funds with tools and know-how can create the same assembled manually. riskier and potentially lucrative assets. mixture-or an even better one-for less money. TAKE CONTROL OF YOUR OWN PORTFOLIO Your long-term financial well-being is important enough for you to leam about the online tools and services available that will help you set your own allocation and rebalance according to your individual circumstances. It's an investment in time that you will be happy you made. SOURCES: JEMSTEP.COM | BRIGHTSCOPE jemstep