A few years ago I wrote about the rise of target date funds in retirement plans.
At the time, the Senate Special Committee on Aging was proposing legislation that would require target date fund managers to take on fiduciary responsibility. The evaluation of target date funds continues and a recent SEC investor survey found that the funds are frequently misunderstood by investors.
Target Date = One-Size Fits All?
While the move toward making long term investing easier is positive, we also tend to recommend against a “one size fits all” approach. We have also found that the use of target date funds can leave investors with a false sense of security.
While the intention is to reduce risk as the target date approaches, this does not necessarily mean that the fund will be risk free at the end of the period. There will likely still be some stock exposure and risk even past the target date.
Target The Details
All target date funds are not created equal and the amount of stock exposure from one 2030 fund to another can vary significantly. The costs may also be higher than investing directly in the underlying funds.
Due diligence is still required and further regulation and standards for these funds are necessary. While a “set it and forget” strategy may be appropriate for some investors, we have found a customized approach to be more successful over the long term.
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