Why target date funds may not be good retirement plans

Many retirement programs and pensions have limited their choices when it comes to funds. Many 401ks and other programs only offer a select few mutual funds called target funds. These funds seem great at first, until you look at the high fees and the generalities surrounding them.

Target funds are usually sold by dates every five years. A target fund is sold as a date such as “2045” and will be invested in a style that will best fit someone who wants to retire by 2045. The underlying problem is that some people need high growth rates to retire at 2045, while others just need to earn a decent return. Target funds should not be taken as a promise that you will have sufficient funds to retire in 2045, but rather that the manager will allocate assets as best as he or she can to grow your wealth now, and protect your capital as you near retirement age.

Often these funds are just a “salad” of other funds. The managers place money in different mutual funds to reach a generally accepted asset allocation to protect your money and provide decent returns. Unfortunately, this means you also pay double fees as you will have to pay for the manager to manage your money and for the fees for the funds in which your money is invested. The target fund is merely the middle man for other funds.

These funds also rarely ever have your best interest in mind. The manager will likely take the target fund money and invest it only in funds offered by the same firm. It would be equivalent to a stockbroker only selling you investments that he holds, or selling you the highest rate fund he can find. Target date funds have a large amount of capital because of the overwhelming number of investors who are privy to getting ripped off.

If you can, try to avoid the target date funds altogether. For the most part, they are nothing but renamed index funds with double the fees.