Target Date Funds vs Personal Advice

Many companies retirement plans include the option of several Target Date Funds (TDF’s). These mutual funds provide a simple solution for participants to invest, based solely on the year they plan on retiring. I believe this option is an over simplification representing the lazy persons way to invest their retirement money.

Target Date Funds (TDFs) shift investors from stocks to bonds over time in an effort to become more conservative as retirement approaches. This transition is referred to as a "glide path" and while the basic concept seems reasonable, TDFs are widely criticized for the limits of their mass market approach.

TDFs cannot incorporate all the relevant personal facts that determine the ideal allocation for one's retirement investments, and investors can find themselves either forfeiting needed growth or accepting unnecessary exposure to an increasingly volatile market. Since TDF make adjustments as you get nearer to retirement, I like to think of TDFs as the lazy person’s way to invest their retirement money. Don’t you think your retirement funds deserve more attention?

TDFs start with the basic premise that a higher percentage of your investment allocation should be allocated to bonds as you approach retirement age. This further assumes that bonds are safer than stocks and thus more appropriate as you age. However, todays extremely low interest rates and the possibility that interest rates will significantly rise can make bond investments more volatile. As interest rates increase, existing bonds tend to decline in value. Thus a simplistic TDF strategy that increases your allocation to bonds based on your age could actually cause more portfolio volatility.

Don't settle for a generic TDF that was designed for millions of participants when you can determine and create your personal retirement date portfolio. With advice from an advisor you trust, you can have comprehensive investment management and cohesive financial planning in your company retirement plan.