The perils of one-size-fits-none Target Date Funds

If you have a retirement account through work, chances are good that in the last few years your plan introduced new fund choices called Target Date Funds (TDFs).

The seemingly simple solution to retirement savings, TDFs include a mix of assets that is set and reset based on your expected date of retirement. Once your money is deposited, you just sit back and wait for retirement. The fund company automatically adjusts the allocation of your investment the closer you get to retirement age, typically reducing the percentage of potentially risky stocks while increasing the percentage of “safe” bonds in your account. Referred to as a Tactical Asset Allocation strategy, it’s a hands-off, one-size-fits-all approach. What could be bad?

Well, a lot actually.

Simply put, no Tactical Asset Allocation can work for every investment environment. Built around end dates and not financially realities, TDFs make no consideration for what is going on in the investing world. Changes are made based on calendar need and nothing else. So if your calendar has you closing in on retirement while interest rates are rising, the shift to so-called “safe” bonds won’t have you feeling so safe.

Often touted as “actively managed” by mutual fund companies, TDFs offer no risk management. This mislabeling confuses investors into thinking that their fund manager will attempt to avoid risk when the stock or bond markets go down. But the truth is these funds are not actively managed and the allocations are changed very infrequently. In fact, many TDFs don’t change their allocations more than once or twice every five years. Quite surprisingly, that lack of management doesn’t always come cheap.

While one would hope that associated TDF fees, which can vary dramatically from firm to firm, would be a reflection of the attention paid to your account, more often than not they reflect a firm’s internal costs. And those costs can run quite high. Granted some fund companies have recently reduced their internal expenses but if you’re not careful, you could end up turning over a good chunk of any potential TDF earnings to help your firm manage internal costs.

So instead of putting your retirement dollars on autopilot with no ability or attempt to avoid the crashes along the way, I suggest you adopt a Strategic Asset Allocation approach that takes the current market conditions into account. Based on investing in individual assets based on their actual merits, this approach requires more attention and effort onyour part but the rewards can be sizable.

By adjusting your investments to how the market is behaving now as opposed to how it’s behaved in the past or may in the future, you gain great control of your assets and create an investment approach that truly fits you and your needs.

Jason MacGregor, principal of Minich MacGregor Wealth Management in Saratoga Springs is a fee-only registered investment adviser who provides investment advice to individual company retirement plan participants. He can be reached at 518-499-4565, jason@ mmwealth.com or Twitter @mmwealth.