Target Date Funds Offer False Sense of Security

Not unlike formal living room furniture and nuclear weapons, target date funds are only to be used in case of a dire emergency. Target date funds are offered as investment options within a lot of retirement plans as low risk investments but, are they? Here are some flaws of TDF’s.

For background, a Target Date Fund (TDF) is a fund that combines so-called growth investments with fixed-income investments in a mixture that is supposed to be appropriate for investors who plan to retire in a certain year. So, presumably a TDF for people planning to retire in 20 years will invest in a riskier mixture than a TDF that is structured for those planning to retire in 5. The theory being a person farther away from retirement needs the growth assumed with more aggressive investments and a person close to retirement needs safer investments that have less chance to decline in value soon before they will need those investments for income. Thus, a TDF implies this investment is all one needs in your retirement plan and, rather than you worrying about which investments to choose, the TDF supposedly does all that for you.

TDF’s are certainly better than stashing your savings in a money market funds earning next to nothing. But, aside from that, your choices are usually much better than that.

False sense of security

All TDF’s “mixtures” of investments are different and many may have you invested more aggressively than you’re comfortable with, or realize, close to retirement. A recent review of more than 40 TDF families showed the percentage of stocks in the funds designed for those retiring in the current year ranged from about 25 percent to about 75 percent. 75% in stocks months before you retire? Are you kidding me?

Target date funds give people a false sense of security that they can stop thinking about their investments altogether because the fund will take care of them. In fact, the Wall Street Journal cited a survey by Alliance Bernstein of 1,000 workers where most “mistakenly believed that using target-date funds would guarantee that their retirement income needs will be met.” Holy financial planning, Batman, that’s scary!

TDF’s only consider your date of retirement

Planning for one’s entire financial future involves many variables – your standard of living and it’s cost, your life expectancy, your family income, responsibilities to your children and, of course, the returns generated by your investments. Unfortunately, a vital flaw of target date funds is they take only one thing into consideration when choosing the investments within the fund – when their investors supposedly plan to retire.

But, what if one invests in a TDF assuming you’ll retire in the year 2030 but then, life gets in the way, and your son takes a couple of extra years to finish college and your daughter needs a little help early in her career and, lo and behold, that 2030 goal now becomes 2035? So, rather than still investing for some growth to make up for some leaner saving years, your TDF has you invested in extraordinarily safe, low-return investments because it assumes you will retire that year and should be taking less risk. This scenario may very well leave you short when it’s time to take income in retirement.

TDF’s assume you have no other investments

Depending on one’s circumstances, it’s certainly not unusual for families to have their savings invested in a variety of accounts. Traditional IRA’s, Roth IRA’s, Joint(husband and wife) accounts, each spouse with a workplace retirement plan, etc. Another real flaw with TDF’s is they naturally assume the investor has 100% of their savings in this one investment vehicle. As a result, your total portfolio may actually be taking too much risk or too little because you are essentially blind to how the TDF is invested. Let’s say you have $250,000 in a TDF in your workplace retirement plan and another $250,000 invested in an IRA – how can you be sure they are working in concert to help you achieve your goals?


We taught our kids from an early age not to hate, so I won’t write I hate TDF’s. 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 supported by a well-thought out investment strategy. On their own, TDF’s offer neither.

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