Target date funds came onto the scene in the early 1990’s. Throughout the past 2 decades they have gained popularity. The funds are a conglomerate of other funds offered by the company. They are set up to be conservative to aggressive depending on how far away retirement is. So a Target Date 2015 fund would be much more conservative than a Target Date 2040 fund. As these funds gain popularity, most people who are enrolled in a 401k will often be automatically put into a target date fund due to how easy they are to use and manage. While they are excellent ways to accumulate money, they do have their ups and downs.
The biggest benefit of the target date fund is the investor does not have to worry about asset allocation. They can simply pick the date that is closest to their date of retirement, and then allow the fund company to do all the work. The funds will rebalance automatically, so the investor does not have to worry about becoming over-weighted in stocks or bonds, and they are designed to become more conservative as the investor approaches the target date. With just one fund in the portfolio (technically that one fund is made up of many more funds), a portfolio overview is quick and easy.
The drawback of these funds is that the internal expenses are higher. There is a lot more work being done by the fund family to maintain them, so they need to charge a higher internal expense ratio to offset their costs. As a result, there is a slightly smaller return on investment. While the target date fund is actually widely diversified, many people become uncomfortable with just one fund in their portfolio. Therefore, they will often want to keep just some of their money in the target date, and manage the rest in other funds. This can be helpful since some of the target date funds will become too conservative too quickly.
For those who just want to plan for retirement, these funds are a great way to do so. With many of the major fund families, such as American Funds, Vanguard Funds, and Oppenheimer Funds, offering them for their retirement clients, there is no reason anyone should be able to use the excuse that they were not available. The higher expense associated with them is justified in the sense that the portfolio is easy to manage, simple to follow, and the worry about rebalancing is negated.
Do any of you invest in Target date funds?
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