Still, the basic idea of target-date funds is sound, says Todd Rosenbluth, director of mutual fund research for S&P Capital IQ. The funds provide professional oversight and a diverse mix of investments at low cost to average investors. But it's important to understand what's in your fund, he says, especially if you have other investments outside the workplace plan.
Target-date funds are designed to be your only investment and to make life simpler for average savers. Other investments you own can throw your overall portfolio out of balance.
Workplace plans may offer other funds that are more appropriate for certain investors than target-date funds. Some people can find a better mix of funds on their own, Rosenbluth says. Moderate-risk balanced funds, for example, have similar attributes of safety and diversity, but take a more tactical approach and tend to produce higher returns in varying markets. "Just because your workplace plan offers a target fund doesn't mean you have to invest in it," Rosenbluth says. "Unless it means you get a matching [employer contribution] and it is the only fund offered. Then it's a no-brainer."
"The problem is that the funds are really complicated," Rosenbluth says. This is true not only for investment strategies, but also in terms of how target-date funds change when a person enters retirement and starts taking payouts, called the "glide path." The funds are making strides to become more tactical and respond more quickly to market trends, he says, but they will always be "constrained by their overall investing rules, though some argue that active managers do no better than passive index funds."
"You'd be hard-pressed to say absolutely that one target fund is better than another. That story hasn't been fully written," Rosenbluth says. "You really won't know how good they are until you reach retirement." As with all investments, past performance is not a predictor, and that's even more true with target-date funds. Even with that government stamp of approval, there is no guarantee.