Target Date Funds are a fixture in many 401(k) plans. They are a good idea in concept, the execution has not always been terrific.
I recently wrote 5 Considerations for Investing in Target-Date Funds for the US News Smarter Investor Blog:
Target-date funds are a staple of many 401(k) plans. Most target-date funds are funds of mutual funds. The three largest firms in the target-date space are Fidelity, T. Rowe Price, and Vanguard with a combined market share of about 80 percent. All three firms use only their own funds as the underlying investments in their target-date fund offerings. Some other firms offer other formats, such as funds of exchange-traded funds, but the fund of mutual funds is still the most common structure.
Here are a few considerations to think about when deciding whether to use a target-date fund option in your company’s retirement savings plan: Click here to read the rest of the article.
Target date funds, like any investment, require thorough analysis to determine if they are the right choice for your personal situation.
Retirement plan sponsors also need to perform their due diligence on Target Date Funds before offering them as an option in their company’s plan. All TDFs are not created equal. There are wide variations in the equity percentages at the various target dates and in the various glide path philosophies. This is not to say that any particular approach is right or wrong, but rather plan sponsors need to look at all aspects of a particular family of Target Date Funds to determine if they are the right choice for their plan, given the demographics of their participants. In short, plan sponsors need to analyze their choice of Target Date Funds as diligently as they would any other investment option offered by the plan.
One size does not fit all here no matter what the fund companies or the plan providers might want you to believe.