Three Important Facts About Target-Date Funds


For those unfamiliar, these products aim to provide a low-maintenance and singular retirement plan option.  These funds, which are also referred to as life-cycle or age-based funds, crossed the $500 billion threshold in 2013 as reported by Morningstar (Reference).  They are designed, through the rebalancing of its asset-allocation, to become more conservative as the target date (usually retirement) approaches.  The demand for these products appears to remain strong.  In fact, Casey Quirk (an asset management consulting firm), predicts that target-date funds will account for nearly half of all U.S. defined contribution plan assets by 2020 (Reference).

While these retirement plan options do indeed make long-term investing easy, I do caution my clients that these funds are anything but simple, and my not really serve the purpose to which they are intended.  Here’s why:

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  1. They are exceptionally complex products.  Each target-date fund comes with its own set of fees, risks, and mix of assets.  Comparing funds against one another is cumbersome task that requires a full understanding of each differentiating factor.  Measuring performance between funds is even harder.
  2. They are typically too generic to meet your needs.  Because these funds do not account for risk tolerances, they typically do not reflect the optimal asset mix.  Because they lack flexibility, these funds tend to underperform more constructive and customized retirement portfolios crafted to meet your unique needs.
  3. They are expensive.  With an average target-date fund expense ratio of 0.70 percent (Reference), investors should seriously consider return erosion, or the impact that fees have on returns.  As noted above, many of these funds will lag the long-term results that can be achieved with a more individualized portfolio.  The added fees of these funds widen the gap.

Most investors select these target-date funds through their employer-sponsored 401(k) plan without ever considering the points noted above.  Be sure to do your diligence and resist selecting a life-cycle fund just because it’s easy.

If you need any help analyzing your options, feel free to contact me.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-7800
E: [email protected]

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Jason explains about himself: I've been managing money for high net worth individuals since 2006. I'm the founder and Managing Director at RGA Investment Advisors LLC, an independent and fee-only registered investment advisor (RIA). I'm the partner in charge of wealth management and financial planning at Rayner and Gilbert CPAs. Prior to a career in wealth management and investment advisory, I held M&A roles at both General Atlantic LLC (GA), a leading global private equity firm providing capital for growth companies driven by information technology or intellectual property, as well as Berkery, Noyes & Co. (BNC), an independent Wall Street investment bank serving the broadly defined knowledge and information marketplace. At GA, I was responsible for deal prospecting, transaction structuring, as well as value added portfolio work. At BNC I specialized in serving large and mid-sized information providers in the U.S. and international markets with strategic mergers & acquisitions, corporate and asset divestitures, strategic research, and valuations. Prior to a career in Finance, I led the due diligence efforts for numerous financial buyers within KPMGs Transaction Services practice, and provided estate planning tax consulting services at the law firm of Buchanan Ingersoll, PC in Washington, DC. I am a CPA who holds the PFS* designation for my expertise in Personal Finance and a CFF** for my accreditation in Financial Forensics. I hold a B.A. from the University of Michigan and an M.S. in Accounting and Finance from the George Washington University School of Business. I lives in New York with my beautiful wife Julianna, two sons, Logan and Henry, and dog, Samantha

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