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.
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.