Say "no" to target date funds

Target date funds are one of the most popular investment options in retirement plans, especially within 401k plans. Target date funds, also known as life-cycle or age-based funds, are funds (generally a mutual fund) that makes an investor's asset allocation more conservative as they get closer to a target date or age. For example, let's say that you're 40 years old and investing for retirement. You might choose a target date fund that is invested 60% in stocks and 40% in bonds with the idea that as you get closer to your target date (let's say age 65) the fund will become more conservative by buying more fixed income investments and less equity investments. If the target date fund was held inside of a 401k, and this was your only account you had for retirement then this could be a feasible idea. However, if you are relying on other accounts outside of your 401k, then this strategy could be detrimental to your retirement plan and long term wealth accumulation.

Here's why: Target date funds, by their very nature, assume that you're an average risk investor and invest accordingly. This means putting 100% of all investors into one fund and making allocations based on the age range the fund is for. The problem with this strategy is that everyone's financial situation is different. For example, two 40 year old individuals saving for retirement may have very different situations. One may only be investing in their 401k for retirement because paying for children's education is the main goal, and the other may not have any kids, and all savings is geared towards retirement, meaning they can retire much sooner. These two individuals should have very different investment strategies. This means that putting everyone into one target-date fund is perfect for no one. Your asset allocation and investment strategy should be specific to your family's goals and should take your entire balance sheet into consideration.

One of the biggest problems that can occur with target date funds is in the distribution phase just as you are retiring. When selling assets to create income in retirement, being able to strategically pick and choose which funds are sold can help navigate market conditions so that selling at a loss is limited or avoided altogether. If you have a properly asset allocated portfolio with multiple funds, for example, you could sell a fixed income fund if the large cap asset class was operating at a loss to avoid selling at a loss. With a target date fund, the fund manager will sell a piece of each investment within the fund, rather than choosing to sell only what is operating at a positive return.

Other issues that occur are with tax loss harvesting, asset location, rebalancing, and many other essential planning strategies.

Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.

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This content has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment advice or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.? The tax and estate planning information provided is general in nature.? It is provided for informational purposes only and should not be construed as legal or tax advice.? Always consult an attorney or tax professional regarding your specific legal or tax situation.