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Why I’m still wary of Target Date Funds

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I’m an ERISA attorney and I handle my own investments, so I’m certainly no financial expert nor do I play one on TV. That being said, I still am wary of target date funds and there really is a simple reason for that.

On paper, I think target date funds are a great savings vehicle for 401(k) plan participants who don’t have the time to rebalance their 401(k) plan. It’s also a great tool for plan sponsors to use as a qualified default investment alternative (QDIA) when they use an automatic enrollment feature.

The reason I have this trepidation over target date funds is because I have a very long memory and I remember the glaring issue about target date funds in the 2008-2010 financial meltdown. Target date funds have a year in their title and the problem with that year is that the target date for that year doesn’t follow any industry guidelines and may invest in more equity than a participant at a certain age may want to handle. Since there are no specific guidelines, a 2040 fund from one company may have a lot more exposure than another fund family’s target date fund for that target date. In my opinion, mutual fund companies put heavy emphasis on the target date for their fund materials, but there is really no standard on what that year really should mean for an investor.

Target date funds are a great marketing vehicle as a mutual fund; I just think another down market is going to highlight their shortcomings. I always prefer lifestyle funds because you know what you’re getting when you’re an aggressive investor or when you’re conservative.

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