Target-Date Retirement Funds: Pros and Cons

by Guest on October 8, 2018

in Benefits

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Whether a target-date retirement fund is the best choice for an investor depends on a few different factors, including the degree to which the investor wants to manage his or her own retirement portfolio. Below are some pros and cons of using target-date funds.

Pros

  • One-stop shopping: For an easy-to-use, all-in-one retirement savings vehicle, a good target-date fund is tough to beat. It allows investors to focus on one of the most important pieces of the retirement savings puzzle—how much to save—rather than getting bogged down in making investment decisions.
  • Professionally managed allocations: Fund shops typically put a great deal of thought into the design of their target-date series. That doesn’t mean target-date funds are perfect, though, or suitable for all investors. Some used allocations that were overly aggressive when the 2008 market crash hit, resulting in heavy losses for their investors, including those who were close to retirement.
  • Automated adjustments: Target-date funds adjust their allocations automatically as the investor’s retirement date approaches. No other commercially available investment product is designed to do this.
  • Reasonable fees: Target-date fund fees are generally in line with those of other mutual funds. Also, target-date funds built around index funds tend to be cheaper than those built around actively managed funds.

Cons

  • Lack of control: For investors who want more control over their investment or allocation choices, target-date funds might not be the best option. By choosing one, an investor is essentially limited to a given fund family’s funds and allocation framework. Some investors may not welcome these constraints.
  • Added complexity if used with other holdings: As an all-in-one vehicle, target-date funds are built to serve as the only retirement holding you need. However, if you’d rather not put all your retirement savings into a target-date fund and/or wish to add satellite holdings, this will mean recalculating the asset allocation of the entire portfolio yourself to make sure it’s in line with your needs.
  • In-retirement shortcomings: Target-date funds may become inadequate once the account holder reaches retirement. For example, those hoping to use assets invested in a target-date fund to generate income to cover living expenses in retirement may be disappointed. In fact, many retirement series put target-date investors into conservatively invested retirement income funds once the retirement date is reached.
  • Despite these potential drawbacks, for many investors a target-date fund may be a great choice to save for retirement provided it comes from a quality fund shop and operates using quality parts—that is, quality underlying funds.

This is for informational purposes only and should not be considered financial planning advice. Diversification does not eliminate the risk of experiencing investment losses. Holding a portfolio of securities for the long-term does not ensure a profitable outcome, and investing in securities always involves risk of loss.

Article contributed by Matisse Capital.
For more information contact Dan Sholian
503-210-3002 | Dan@matissecap.com

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