Target-date funds are a popular option in most 401(k) accounts. Just pick the year you’ll retire, they pick the investments, and you’re all set.
Heck, when clients ask us to review their 401(k) accounts, we’ve been known to pick a target-date fund or two.
And why not? They make sense when you’re pressed for time, lack expertise, have limited choices available, small balances to invest, or in our case, when we can’t access the 401(k) plan directly and have to explain to you how to trade the account in a way that you’ll find easy to implement.
Let’s face it, target-date funds are often a huge improvement over a complicated line-up of mediocre investment choices with heavily padded expenses. And many target-date funds do an excellent job of providing you with a diversified, well-balanced portfolio with minimal fuss and drama.
But just because it’s simple doesn’t mean every “one-size-fits-all” solution is going to give you a comfortable or flattering fit.
“Target-date funds aren’t without their faults,” says David Blanchett, head of retirement research for Morningstar Investment Management.
A key problem, he recently wrote in a Wall Street Journal blog, is that using target-date funds, everyone the same age has the same equity allocation.
That makes no sense.
“Can you imagine walking into a doctor’s office and being prescribed a medication based only on your age?” he quips.
For many people, personalized advice based on their retirement goals, savings capacity, risk tolerance and other factors leads to a better fit.
So here’s the takeaway.
Simplicity can be good. Many one-size-fits-all solutions can be good, too. A good target-date fund is an excellent choice for many 401(k) plan accounts.
But when it’s for something really important – like the rest of your financial life – ask yourself whether you want it simple, or you want it right.