Target Date Funds Are Evil

Okay, not evil, I was embellishing to get your attention. They are, however, misleading, offer a false sense of security and, not unlike fire extinguishers and bow ties, are to be used only in a dire emergency.

To highlight the misleading nature of Target Date funds, I recently examined the investments within the Fidelity Freedom 2035 Fund and the TIAA-CREF Lifecycle 2035 Fund. Despite the fact they are both supposedly invested for someone planning on retiring in the year 2035, there are profound differences in what they actually invest in. Here is what I found:

• TIAA-CREF is invested in:
  • 50.64% U.S. stocks;
  • 21.93% Non-U.S. stocks;
  • 26.42% Fixed Income (bonds)
  • 1% in Cash
• Fidelity is invested in:
  • 48.92% U.S. stocks;
  • 32.20% Non-U.S. stocks;
  • 16.13% Bonds;
  • 2.75% Cash.

So, which is correct if you plan to retire in the year 2035?

• Should you own 22% in international companies or 32%
• Should you have 26% in bonds or 16% in bonds?
• Make no mistake, differences that large can mean drastically different returns between each fund over time.

“Set it and forget it” is the mantra of Target Date funds. If you want to retire in the year, say, 2035, invest in a fund with that number on it and never worry again whether your hard-earned savings are invested appropriately for your individual situation. But, wait, how does the fund know how much income you’ll need in retirement? Or whether you have a spouse that works and also saves? Or whether you have other investments like an IRA, or Roth IRA? What if your circumstances change and you think you can retire before that 2035 date? Or have to work longer?

Conclusion

Target Date Funds are not inherently evil. In fact, they are much better than just allowing your savings to languish in a money market fund earning next to nothing. But, too many people choose them because they believe their decision-making ends with that one choice. As always, reaching whatever life goals you have depends on a solid financial plan that supports a well thought out investment strategy. On their own, Target Date Funds offer neither.

Steve Byars, CFP®