Target-date funds may seem like the easy way to invest for retirement, but this hands-off method of investing might not be the best for you.
For many, they’re convenient, named simply for the decade when an investor expects to retire and they change over time based on risk levels considered appropriate for your age. For instance, investors who are currently 25 and want to retire at 65 might choose a 2050 target date fund.
You decide how much of your paycheck you want to save in your employer-sponsored 401(k), for example, and a target-date fund manager automatically changes your investment mix over time, the Department of Labor and the Securities and Exchange Commission explained in a recent investor bulletin.
Depending on your personality, however, you might be better off choosing other funds on your own, including index funds, large-cap funds that invest in big companies, mid-cap funds, bond funds and others depending on your own preference.
“Target date funds, even if they share the same target date, for example 2030, may have very different strategies and risks,” according to the government agencies.
What Target Date Funds Are Not
Employers may trust target-date funds enough to make them the default investment for their employees, but target-date investing can’t promise great returns, or any returns at all for that matter, the government agencies say.
For instance, while they should have been fairly conservatively invested, funds with the target date of 2010 lost almost 24% in 2008 and between 7% and 31% in 2009, according to the SEC.
Probably the worst performing 2010 target date fund in 2008, the Oppenheimer Transition 2010, lost 41% that year, noted The Boston Globe last year. But that may have been largely because its 20% investment in a conservative bond fund turned out to be a bad idea as well. Oppenheimer’s Core Bond fund plummeted by 36% during the height of the recession, the Globe reported.