Are Target Date Funds the Best for Your Retirement Goals?

Everyone seems to have an opinion about target date funds.

On one side, they make 401(k) investing easy.

On the other, there can be a significant difference in performance over time from target date funds versus other plan options.

In this article, we’re breaking down everything you need to know about target date funds so you can make the best choice for your financial future.

Defining Target Date Funds

A target date fund, as the name implies, targets a certain retirement date.

Rather than your money being invested as an individual based on your own goals, objectives, and risk tolerance, you are lumped in with your peers based on your age and expected retirement date.

So, for example, if you are set to retire in 2050, you are put in a 2050 fund.

The idea is that the younger you are, the more aggressive you can be because you have a longer time horizon for your money to work for you.

And the closer you get to your expected retirement date, your portfolio becomes more conservative to reduce risk.

The Upside of TDFs

TDFs are popular with some investors because they are easy and they take a lot of the thought out of selecting investment options. They set a glide path toward your retirement.

You contribute each paycheck to your 401(k) and dollar cost average into it over a long period of time.

You don’t have to be all that engaged with your 401(k) because the idea is that the fund will adjust over time based on your proximity to retirement in terms of risk.

The Downside of TDFs

The idea of a target date fund is that you don’t have to worry about your 401(k).

Again, you’re on a glide path toward your retirement – more aggressive in the early years and more conservative in the latter years.

While they may take the guesswork out of investing, target date funds generally do not do a good job of managing risk when times are tough.

Take last year for example. Not only did the market go down in 2022, but interest rates went up. Even the bond portion of a target date fund was performing subpar because when interest rates go up, bond prices go down.

It’s not just down markets that may hinder your portfolio growth.

Target date funds generally underperform when the market is doing well.

This doesn’t necessarily mean over the long term TDFs won’t perform well enough for you to meet your goals.

But those who want to engage with their 401(k)s and choose investments in the plan menu are likely to do better over time.

Watch Mark Sorensen, CIO of 401(k) Maneuver, show the difference in performance between TDFs and other investments in a 401(k) menu.

There is nothing wrong with the target date fund. It’s simple. It’s easy.

But if you want your money to really work for you so you have even more money in retirement, it may be time to rethink target date funds.

We encourage you to pull up multiple statements and look at the performance for every investment that’s allowed in your 401(k) and compare the TDF performance to the other funds on your statement.

Again, look at multiple statements.

Chances are, what you’ll find is that other funds outperform target date funds over time.

Be in What’s Working and out of What’s Not

The key to maximizing your retirement savings – to really have your money work for you – is to be in what’s working and out of what’s not.

And that takes engagement and learning on your own.

Or, you could turn over your 401(k) to professional management.

There are a lot of professional management platforms that are very much like target date funds. They manage your money based on age and expected retirement date.

And then there is 401(k) Maneuver. We take into consideration your risk tolerance, goals, and experiences over time.

For example, you could have two people the same age with the same expected retirement date. And they’re both nearing retirement.

One of them, for whatever reason, has to catch up. The other one is fully engaged with their 401(k) and saved quite a bit over the years, and they want to preserve what they have.

The one who has to catch up probably needs to add risk or they’re never going to catch up. The other one wants to be conservative and protect what they have.

They’re the same age. They have the same expected retirement date. But they’re very different.

At 401(k) Maneuver, we view our clients as individuals and take into consideration their unique situation.

We look at our clients’ 401(k) accounts every quarter, and we rebalance them with the goal to be in what’s working and out of what’s not.

Specifically, we look at current economic and market conditions and ask how much exposure we should have to the market over the next 90 days.

From there, we allocate whatever percentage we think should be in equity (or the stock market) and invest it where we see momentum in specific investment styles or market sectors.

In other words, we back out of what’s not working and into what is.

In addition to managing your investments and quarterly rebalancing your 401(k), personalized account management may also help you stay on course to meet your retirement goals.

Professional 401(k) management help has been shown to increase 401(k) investors’ returns.

In a 2019 study titled Advisor’s Alpha, The Vanguard Fund Group, Inc., reported a 3% average increase in the value of portfolios of clients who have their accounts professionally managed.¹

[Check out our 401(k) Calculator to see how professionally managed help may impact your 401(k) balance in retirement.]

The best part is with 401(k) Maneuver as your professional account management, there are no time-consuming in-person meetings and nothing new to learn, and you don’t have to move your account.

Simply connect your account to our secure platform, and we regularly review and rebalance your account for you, when necessary.

Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.

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