3 Reasons to Avoid Target-Date Retirement Funds

December 11, 2012

Owning a retirement target date fund could throw off a balanced approach to your investments.

 

What’s wrong with retirement target date funds? Below are just a few reasons you should avoid these funds and instead develop a more personal investment strategy.

 

First, most retirement target date funds are “funds of funds,” which means you own many funds, not just one. You will have the same allocation issues you would have with owning the funds yourself in attempting to own a precise amount of each of many asset classes.

 

Next, these funds do not take into account what you own elsewhere, what your goals are, how much you are saving, what other income you will have in retirement, or what your desire for risk is. If I provided advice based on not knowing the above, I wouldn’t last long as an investment advisor.

 

Finally, most are designed to do little more than track large cap US dominated stock and total bond market indexes.

 

Take Vanguard’s Target Retirement 2050 (VFIFX) fund as an example. The fund has a 90% allocation to stocks. While this much stock market exposuremay be entirely appropriate, if the reasoning for that much “risk” is that it will be rewarded it certainly is not reflected in the relatively minor use of small cap (5.64% + 1.87% micro), mid cap (18.80%), or foreign (27.31%) and emerging markets (5.07%). All percentages trail the Morningstar Lifetime Moderate 2050 as a benchmark.

 

What’s more, that same allocation within equities is the same whether you expect to retire in 40 years, or retired already and own the Target Retirement 2010 fund (VTENX). Is it appropriate to have the same allocation to risky assets when you are 30 as when you are 70?

 

The above is not unique to Vanguard, and if there is a company whose target date funds I would choose over others it would be theirs. However, the above shows why you should trust not even the best fund managers to provide a one-stop solution for a retirement portfolio. You’re a little more unique than they can possibly know.

 

The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/

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