True or False: Target-Date Funds Guarantee Retirement Success?

What to look for in a TDF

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Roger Wohlner

A recent Wall Street Journal article cited an Alliance Bernstein survey of 1,000 workers taken in February about target-date funds in which over half “mistakenly believe[d] that using target-date funds will guarantee that their retirement income needs will be met.”

[See 5 Considerations for Investing in Target-Date-Funds.]

As both a financial planner and as an adviser to retirement plan sponsors and to individual plan participants, I find this result appalling.

The fund companies offering them would be the first to tell you (I hope) that there is nothing guaranteed about TDFs. There is a growing movement within the retirement plan space to add guaranteed-income products to TDFs, but that hardly means that TDFs guarantee success.

Why would so many plan participants harbor this mistaken belief? My guess is that this in part stems from a lack of education as to what these funds are and what they are not. If you are considering a TDF for all or part of your 401(k) account or as an investment in general, here are a few things to consider:

TDFs with the same target date may vary widely as to their asset allocation. There is no requirement that a TDF with a given target date have any particular allocation to equities, fixed income, etc. In fact, these allocations can vary widely among TDFs with the same target date.

The fund with the target date closest to your intended retirement might not be the best fund for your needs. As with any investment, you need to look at the fund’s investment allocation in light of your financial goals, risk tolerance, etc. You should also look at the fund as a part of your overall portfolio if you have investments outside of your retirement plan, such as IRAs, taxable accounts, a spouse’s retirement plan, and the like.

Many TDFs are funds of the mutual fund company’s funds. This is the case for Vanguard, Fidelity, and T. Rowe Price, which collectively have about 80 percent of the TDF assets. This is not good or bad, but you should take a look at the funds that make up the TDF that you are considering. In some cases, I’ve seen fund companies use funds other than what I consider to be their top funds; perhaps they are looking to add assets to these funds.

Most of all, remember that the biggest single determinant in retirement success is the amount saved. If you start early, save as much as you can, have a financial plan in place, make good investment choices, and seek professional help if you need it, the benefits will likely far outweigh the costs.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner.