Are Target Date Funds a Good Investment?
Target Date Funds (TDFs) have one major feature that is not duplicated by other investments. They are very simple selection decision. The way a TDF works, is you pick a year (the target date) you plan to retire and invest in a fund for that year.
In addition, TDFs do everything for investors: Investment selection, diversification, rebalancing, risk management – all in one. They are the ultimate “set-it-and-forget-it” investment choice.
Are TDFs a good investment? The answer is yes, under certain conditions. We will tell you what those conditions are.
Investors Who Have Limited Investment Knowledge
A high percentage of the people who are accumulating assets for retirement do not know much about investing the assets. In particular, this true when the person is a participant in a 401k plan.
The plan is a retirement benefit that is provided by employers. Employees are participants. Trustees oversee the plan for the employer and the participants.
Plan participants can be faced with a number of confusing choices. Which investments are best for me? How much should I put in each investment? What performance should I expect? How risky is the investment? How much am I paying for asset management.
The simple decision is to “default” to an investment decision that is made by the employer, who in most cases will invest participant assets in a TDF. Note, the employer decides which TDF is appropriate for you, as well as all the other defaulted plan participants.
Investors Who Are Knowledgeable About Investing
If people are knowledgeable about investing, they can search for TDFs that meet their specific needs. They also know how to evaluate different TDFs with the same target dates to pick the one with the best odds of producing the best results. This process requires time and knowledge to find the best TDF based on performance, risk exposure, diversification, and expense.
Personalizing Your Target Date Portfolio
Target date mutual funds pool assets so they are definitely a one-size-fits-all investment process. This means there is a good chance you won’t find a TDF that meets all of your needs. Some might not be diversified enough or there is excessive risk near retirement years.
There is an alternative that manages your portfolio along your customized glide path and you can modify the glide path based on your responses to life events.
These are not Target Date Funds (mutual funds). They are Target Date Portfolios (TDPs) that can be tailored to your specific needs and requirements.
Why You Need a Top-Quality Advisor
If you are creating your own TDP, you should engage the services of a high quality investment advisor who knows you and how to build portfolios based on your specific target date, goals, requirements, and tolerance for risk.
The advisor can help you select investments and manage asset allocations that reduce your risk over time. The right professional will also monitor the results that are produced by the TDP and report them to you.
Selecting the right advisor is a critical decision. You are not seeking an advisor who can sell you an investment product. You are seeking an advisor who can help you build and manage a Target Date Portfolio that will impact when you retire, how you live during retirement, and your financial security late in life when you need it the most.
About the Author: Ron Surz is CEO and CIO of GlidePath Wealth Management an innovative money management firm that uses a patented investment process to invest retirement assets that are held outside qualified retirement plans. GlidePath manages Target Date, Invest-for-100, Special Situations and Recession Protection Portfolios.