Target-Date Funds: A Major Player on the Investment Scene

Whenever I read negative Target-Date Fund (TDF) critiques, my initial response is to consider the motives of those critics, who often are Wazoos in the business of selling investment advice themselves. Most of them view TDFs as competitors rather than tools. And they’re right.

Most critics of TDFs consider them stiff competitors – and wish they’d go away. Personally, I view TDFs the same way I view individual index funds – a very positive development for new investors or folks with…perhaps by choice…very little time to spend creating an investment portfolio for retirement…or for the laggards among us.

What are TDFs?

By definition, TDFs invest in an age-appropriate mix of mutual funds that over time become more conservative as an individual investor approaches retirement. And TDFs rebalance back to a target allocation on a continuing basis. Why is this important? Because most of us are simply not wired to rebalance on our own. It involves making hard decisions during volatile times, which is psychologically difficult for most of us to do.

For example, when markets are running scared, a 60% equity/40% bondholder’s equity allocation might shift to 50%, requiring a shift back to a desired 60% equity position during such volatility. With TDFs, target-date managers do that on behalf of fundholders on an ongoing basis. Conversely, in an upward-trending market, TDF fund managers take risk out of a TDF portfolio by selling stock—something most of us are inclined not to do when our equity balances are growing.

In short, most 401(k) participants (and other investors) tend not to be day-traders…generally speaking, a good thing, but it doesn’t fit the TDF rationale. A rationale that constantly rebalances and gradually shifts a retirement portfolio toward conservatism.

Major Player

Since arriving on the scene, TDFs have become the biggest positive investment resource for investors since John Bogle’s game-changing index fund, which if memory serves, was treated by that era’s Wazoos as a foolhardy approach to retirement investing…until research indicated that the S&P 500 index fund routinely bested managed funds.

To their credit, TDFs eliminate asset allocation and investment selection as time-munching and confusing choices for new, busy, and lazybones investors. And not just in the here and now - but for those many decades leading to retirement.

TDFs are also a means of accessing low-cost, expert advice for those who can’t otherwise afford it…or who suffer from spur-of-the moment, possibly irrational, decision-making tendencies.

And in my humble opinion, TDFs offer what I call “dare to be average” outcomes for investors willing to take a more hands-off approach to investing. More and more of us are willing to do just that, even though we find being “average” is hard to accept. (Until we learn that average beats many other so-called sophisticated approaches to investing.)

The 401(k) Crowd

Generally speaking, 401(k) participants are a rather passive bunch in their approach to investing. This makes them obvious candidates for buying TDFs.

More and more employees are being auto-enrolled in 401(k) plans when hired. They make their initial investment choices, and then do little or no trading. Because auto-enrolling has increased 401(k) participation rather dramatically, it has increased the holdings of TDFs in those accounts, too…a good thing. By the way, TDFs remain more underutilized by investors outside of 401(k)s but can just as easily serve these folks as well.

So, if you’re in an IRA or other personal investment account, a TDF might be just what you’re looking for! Give it a shot!