Almost one in four 401(k) participants invest solely in target-date funds—a six-fold increase over the past five years. And assets in TDFs have bulged to approximately $475 billion.
Yet, despite the growing popularity of TDFs, flaws with these types of investments abound. Let’s examine just a few of them:
TDFs encourage people to be lazy. A person’s first choice for their retirement investments should never be a canned asset allocation default solution. Instead, we should be encouraging investors to have a customized investment mix that perfectly matches them. That includes a plan that accounts for their age, risk tolerance, and goals rather than a one-size-fits-all retirement fund.
TDFs don’t properly tackle the issue of longevity. Living beyond one’s financial resources is a serious problem that faces millions of retirees. A TDF that switches the bulk of its allocation to bonds when a person reaches the standard retirement age range of 65-70, may subject these individuals to very large inflationary risks should they end up living longer than they expect.
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TDFs undermine the crucial role of professional investment advice. If the main purpose of a TDF is to help 401(k) savers to get the right asset mix, of what value are financial advisors who provide the same service? When I worked as a financial advisor, I never recommended TDFs because I recognized the threat they posed to the personalized investment advice I was giving to my clients. And now, as an outside observer, my views haven’t changed. I think any financial advisor who recommends or sells a TDF is out of their mind.