Should You Invest in a Target Retirement Date Fund?
Target Date Funds were intended to be a “one-size fits all” retirement investment vehicle. Investors were encouraged to put most if not all of their retirement portfolio into a retirement date fund after selecting a target retirement date. Then, the theory went, they could sit back, relax, and watch as the fund grew over time while automatically adjusting the fund’s asset allocations as their target date approached.
And the saddest news of all was for investors who bought funds designed for a target retirement date of 2010. Those funds (there were 31 of them) produced results that were all over the place. The best 2010 target date fund dropped 3.5%. The worst fell 41.3%. Ouch. Happy Retirement 2010!
I don’t care how young or old you are but if you put money in an investment that is specifically designed for your retirement golden years, you never want to experience declines like that. It is emotionally upsetting to say the least and counter-intuitive to the understood purpose of the fund.
So what happened next?
First, many retirement investors pulled their money out and either went to cash or chose another asset class to invest in. (Sadly those folks who pulled out missed the 2009 mini-rally). This happened just when many mutual fund companies were jumping on the bandwagon and joining the parade of new target date funds.
Second, the domino effect caused some of the newcomer target date funds to surrender to the marketplace and simply liquidate. (A fund liquidates when it stops accepting new investments, sells its current investment assets, returns the remaining funds pro rata to investors, and then closes down.) According to this report, seven target date funds liquidated in 2008. So far in 2009, fifteen have liquidated. There are probably more on the way, as investors remain wary and disinterested based on the 2008 debacle. There are 246 retirement date funds with fewer than $100 million in assets, which is probably below the sustainable level.
This leaves 80% of target date fund assets concentrated in just three companies: Vanguard, Fidelity, and T. Rowe Price.
So what should you do about investing in target date funds? I would go elsewhere with your retirement money, as I did in 2008. I believe that retirement date funds were an experiment gone bad.
If you like the “set and forget” retirement investing strategy, there are a variety of different “lazy man” and “couch potato” portfolios available to you. Investigate them and pick one that matches two important personal characteristics. The first is your risk tolerance. The second is your retirement trajectory.
Note that a retirement trajectory is different from a target retirement “date” because it takes into account how your employment income may phase out over time instead of perhaps suddenly ending. You may be planning for a phased retirement. If so, your “target date” may not be a fixed date at all.
Finally, remember that when you are investing for retirement, your primary objective is to establish and preserve a stream of essential retirement income. Building wealth is secondary.