Are Target Date Funds All They Are Cracked Up To Be?

In the quest for my industry to offer investors a worry-free retirement, what LCM Capital Management refers to as be lazy and still get paid, many investors and their advisors have turned to target date funds (TDFs) as the holy grail of hands-off investing, especially within one’s work retirement plans. Target Dates promise a set-it-and-forget-it approach, with these funds automatically adjusting their asset allocation as your predetermined retirement date draws near i.e. age 65. Sounds like a dream, right? Well, it's time to wake up and smell the coffee.

Target date funds sell themselves on simplicity. Choose a fund with your retirement year in the name, and you're off to The Kentucky Derby (races), well at least your broker/advisor is. TDF’s aim for a retirement year that is close to the year you turn 65, which is considered Normal Retirement Age (NRA). For example, if you are 25, you might invest in a 2065 TDF, and if you are 50, you might would pick a 2040 fund. The fund managers do the rest, shifting from stocks to bonds as you age. The premise being, the older you get, the more conservative you get. A problem with this, not everyone gets conservative as they age and this is one of the most critical oversights of a TDF. It assumes (everyone knows what that stands for) that all investors with the same retirement date have identical financial needs and risk tolerances. This is as flawed as it is simplistic. Having managed client assets for over 36 years, I can assure you, no one investor is alike and the one-size-fits-all approach of TDFs overlooks individual risk tolerance, financial situations, and retirement goals and basically puts every 40-year-old for example, in the same box.

Dive into the expense ratios of TDFs, and you might find yourself wading through murky waters. These funds often harbor higher fees due to their "fund of funds" structure, quietly chipping away at your returns. And when it comes to performance, the picture doesn't get prettier. The promise of a managed, gradual shift to conservative investments doesn't guarantee better outcomes. In fact, many investors find themselves questioning if the convenience was worth the cost. Think about the last three or four years when the Federal Reserve started their interest rate hiking experiment. If you were close to retirement age, i.e. 65, you would be holding more bond funds than stock funds. Bond funds were decimated and yes while stock funds were too, stocks have since recovered from this correction, bond funds still have not.

Investing in a TDF might make you feel like you are taking action on your retirement planning, but it's a simplistic approach at best. True retirement planning requires a deeper understanding of your assets, considering factors like inflation, healthcare costs, and unexpected life events. The evolving financial landscape calls for a more detailed approach. Working with a financial advisor like LCM Capital Management to create a personalized investment strategy can offer a better path to achieving your retirement goals. Any strategy should consider your unique financial situation, risk tolerance, and retirement aspirations. By outsourcing these decisions to a TDF, you might be missing out on opportunities to optimize your investments according to your personal circumstances.

Hopefully as we peeled back the layers of simplicity surrounding target date funds, it's clear that they might not be the panacea they're made out to be. A one-size-fits-all solution is not the answer. By seeking personalized advice and adopting a more active role in your retirement planning, you can tailor your unique life’s journey. The path to a fulfilling retirement is complex, but with the right tools and guidance, it is one that can lead to financial security and peace of mind.

There is a better way!

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.