There has been quite a bit written recently, mostly negative, about target date funds. It is hard to understand why since they provide retirement plan participants with:
- A professionally selected, diversified and managed investment portfolio at a competitive cost;
- An accessible and time efficient approach to investing for those “set-it and forget-it” retirement plan participants who wish to spend as little time as possible managing their retirement plan balance;
- A much better investment solution than anything that existed previously for those “set-it and forget-it” retirement plan participants. Keep in mind that before target date funds became widely used, these participants might select where to invest their balances using methods that did not ensure diversification, appropriate risk exposure, etc.;
- Flexibility. There is a target date series for every employee population with choices that include passive or active management, to or through target dates and varying glide paths;
- A way to invest that is far superior to the fatally flawed risk based approaches (conservative, moderate, aggressive, etc.). Risk based portfolios require retirement plan participants to change the portfolio they are invested in when their risk tolerance changes. Ability to take on risk changes as participants age or when they experience a change in family status. Most participants in risk based portfolios never take the time to make these adjustments and, as a result, end up in a portfolio that is too risky. These investors often learn that they have taken on too much risk only when the market falls and they have experienced losses which were beyond their expectations. Target date funds have professional managers who adjust the risk profile of the fund as time goes by to account for changes in risk tolerance as participants age.
