Objective information about retirement, financial planning and investments


Target Date Funds Don’t Guarantee Retirement Success


A recent article in the Wall Street Journal professional edition was entitled “Target” Funds Still Missing the Mark. The premise of the article was that Target Date Funds were falling short in their investment returns and were doing nothing to help 401(k) participants regain some of the ground they had lost during the 2008-09 stock market decline.  Another Wall Street Journal Article in early 2011 cited an Alliance Bernstein survey of 1,000 workers which over half “mistakenly believed that using target-date funds would guarantee that their retirement income needs will be met.”

As both a financial planner working with individual investors and as an advisor to several 401(k) plan sponsors I find this survey result appalling and disturbing.  Moreover, it reinforces my concerns that 401(k) participants as well as some plan sponsors really don’t understand the pros and cons of Target Date Funds.

The fund companies offering them would be the first to tell you that there is nothing guaranteed about TDFs. There is a growing movement within the retirement plan space to add guaranteed-income products to Target Date Funds, but this won’t guarantee retirement success either.

Is a Target Date Fund the right choice for you?

The key to determining if a Target Date Fund is the right choice for your retirement savings is to understand them.  If you are considering a TDF for all or part of your 401(k) account or as an investment in general, here are two things to consider:

  • Target Date Funds from various providers with the same target date may vary widely as to their asset allocation and investment approach. There is no requirement that a TDF with a given target date have any particular allocation to equities, fixed income, etc.  The fund with the target date closest to your intended retirement might not be the best fund for your needs. As with any investment, you need to look at the fund’s investment allocation in light of your financial goals, risk tolerance, etc. You should also look at the fund as a part of your overall portfolio if you have investments outside of your retirement plan, such as IRAs, taxable accounts, a spouse’s retirement plan, and the like.
  • Many Target Date Funds are funds of the mutual fund company’s funds. This is the case for Vanguard, Fidelity, and T. Rowe Price, which collectively have about 80 percent of the TDF assets. This is not good or bad, but you should take a look at the funds that make up the TDF that you are considering. In some cases, I’ve seen fund companies use funds other than what I consider to be their top funds; perhaps they are looking to add assets to these funds.

Target Date Funds gather a huge amount of assets for the fund companies offering them, both as a component in many 401(k) plans and as a rollover vehicle when participants leave their employer.  Remember your investment choices should be all about you and what’s right for your situation.

Most of all, remember that the biggest single determinant in retirement success is the amount saved. If you start early, save as much as you can, have a financial plan in place, and make good investment choices, you will give yourself a good shot at accumulating enough to fund your retirement.  There are no guarantees of course.

Please feel free to contact me with questions about 401(k) plan and about your retirement planning needs.

Check out our Resources page for links to a variety of tools and services that might be beneficial to you.

Photo credit:  Wikipedia

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  1. Good post Roger. I find those findings a bit appalling myself. TDF’s can be a great tool for someone that is wanting to take a less active approach, however that does not mean it should be done unwittingly. It just goes to show again why research and educating oneself as to what the fund is holding is vital. Otherwise, you’re likely to get something that is not a good fit to you.

    • Roger Wohlner says

      Thanks John. I’m not a fan of TDFs for anyone say within 15 years or so of retirement. They are fine for younger participants as they provide a diversified portfolio right off of the bat and for the longer dated funds provide what is generally an age appropriate portfolio.

  2. You bring up a great point Roger. The unfortunate truth is investors cannot afford (pun intended) to turn a blind eye to their portfolios. Target date funds offer what I call a “click & hope” approach to investing. Thanks for shedding light on this for me.

  3. Good post Roger. I think TDFs are great for young investors. In my opinion, many young investors should be focusing more on their human capital as opposed to picking the perfect investments. As you mentioned, TDFs provide a good diversified approach for those just starting out.

    It is hard to beat the low fees, automatic re-balancing, and proper bond/stock allocation all in one place for the young investor. As a person ages, a more sophisticated approach might be needed though.


    • Roger Wohlner says

      Oliver thanks for your comment. My 24 year old daughter is in a long-dated fund and it is right for her. However for anyone say in the 40-45 range or older I’m not a fan. Also as far as expenses this is a mixed bag. Vanguard is dirt cheap as you’d expect, Fidelity and T. Rowe are pretty reasonable, not so with a number of the other TDF suites. Investors also need to be aware of the differences among share classes of TDFs from the same issuer.

      • Yeah, I guess I just assume everyone knows of Vanguard’s low fees and history. I wasn’t aware of the number of other TDF’s with high fees. With that knowledge, I would change my suggestion to “certain TDFs are a good fit for young investors.” 🙂

  4. I’ve given this some thought. You saw Jack Bogle’s interview on PBS’ retirement show.
    Jack talked about one’s pension and/or social security as being a cash/bond asset in one’s big picture. Hold that thought.
    I handle my 85 yr old mother in law’s accounts, legally, with POA. Of a total $220K in IRAs/Roth/cash account, only $50K is in money market/cash. The target date fund, and common wisdom would put less than 15% in stocks. But for the fact that she lives comfortably on about $35K, and nearly $30K comes from her pension (no SS, she was a teacher, in our state they get the pension only) she’s looking to her own assets for a $5-$8K withdrawal each year.
    Interesting thing is that at 75, I was a bit more conservative, and rebalanced to this higher level during the last crash. For her, the 00’s were anything but ‘lost.’

    “Set it and forget it” is great for rotisserie chicken, but in my opinion, target funds have two major failings, the higher cost, and the fact that they naturally can’t take other assets into consideration.

    • Roger Wohlner says

      Sounds like your mother in law’s accounts are in good hands. I tend to like TDFs for younger workers (such as my 24 year old daughter) for whom their retirement plan might be their only investment. The longer dated TDFs provide an aggressive approach and instant diversification. As for anyone over say 40 or 45 I’m not a fan as much for the reasons you mentioned as anything else.

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