The Pros and Cons of Target Date Funds

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“Target date” funds, which gradually shift their exposures from higher-risk assets such as stocks to lower-risk assets such as bonds as their investors’ target retirement date approaches, have proliferated in recent years. (These are the funds whose names typically include a year, such as the “Fidelity Freedom 2045 Fund”.) According to Morningstar, more than $500 billion is invested in these funds. So should you put your retirement savings into a target date fund? Like many questions relating to managing your wealth, there’s no one-size-fits-all answer: it depends on your investing preferences.

The benefits of target date funds are straightforward: they take care of managing the retirement portion of your portfolio for you. A target date fund shifts its allocation toward lower-risk investments over time, so you don’t have to worry about having the right mix of asset classes or deciding when you need to rebalance them. You also don’t need to worry about picking investments for each asset class since each target date fund has a pre-set list of funds that it uses (typically ones managed by the same company that runs the target date fund). So for investors who take a very hands-off approach and want someone else to make the decisions, a target date fund can be a good solution.

The flip side, of course, is that with target date funds you don’t have control over what you’re invested in. If you want a different allocation or you don’t like the underlying funds that the target date fund uses, there’s no way to customize your investment. Target date funds can also be more expensive than a do-it-yourself approach, since they charge a management fee for maintaining the allocation among the different asset classes on top of the management fees of the underlying funds. So for investors who want more control over their investment decisions, a target date fund may not be the right choice.

Topics: Blog Retirement target date funds