Home  >  Financial Articles and Q&A  >  I have 100% of my retirement money in a target date fund....

I have 100% of my retirement money in a target date fund. Do you consider that diversified enough or not?

Jan 04, 2012 by Ryan from San Diego, CA in  |  Flag
17 Answers  |  30 Followers
Follow Question
1 vote
Don Unger, MSFS Level 18

If you are the type of investor that is not comfortable with making changes in your 401K asset allocations or don't feel you have the time to watch your account closely (or don't have the temperament to watch it closely), then Target Date Funds may just be perfect for you. I would check to see if there are any non-market correlated alternative options to select from, these would be assets that don't track the markets (and there may be some in the TDFs) like real estate, precious metals etc. Aks your HR person at work or ask them to put you in touch with someone who can give you more personalized advice.

The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

Comment   |  Flag   |  Oct 02, 2012 from Henrico, VA

1|600 characters needed characters left
1 vote

I have six main concerns. (1) The allocation may not be right for you because one size rarely fits all. (2) The future allocation may not be what is right for you (3) You may not understand what the current allocation is and how it changes over time (4) The diversification is only among funds in the same family and you may not have true diversification of investment styles (5) The same family rarely excels in both income and stock funds so the performance may not be as good as other funds available to you (6) Most people who choose one option do not have someone like a financial adviser to guide them.I would seek some help from a local fee-only adviser.

Comment   |  Flag   |  Apr 23, 2013 from Charlotte, NC

1|600 characters needed characters left
1 vote

Ryan,

Lot of answers from well qualified people. But I am going to provide my 2 cents also.

Target Date Funds are turnkey funds for making life simple for Plan Sponsors and Employees. However, the answer to your question depends on who is managing the Fund and how they perceive the risks in bonds to be. It also depends on how this fits in your overall portfolio. If you are looking for simplicity and ease of use, these are great investment vehicles.

If your Target Date Fund has the fixed income portion invested in the broad bond market (tracking the Barclays Aggregate Bond Index), then there could be some issues, as this index is over weight U.S. Government Bonds, which will be a losing proposition in the next 5-10 years, as interest rates rise and these bonds lose value. For example, this index currently has a Duration over 5 and Yield To Maturity less than 2%, which implies that it will produce a 2% return if held to maturity, assuming interest rates do not rise. If interest rates do rise, based on Fed's tapering program, then one could lose principal as well.

Also, in some ways one could make the case that Domestic Equities are fairly valued. This is not to say that they could not keep rising from money flows and relative value trades. Needless to say it is a very challenging environment to add value both on the equity and fixed income asset classes.

The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

1 Comment   |  Flag   |  May 16, 2013 from Appleton, WI
Prateek Mehrotra, MBA, CFA®, CAIA®

I would like to further add that a standard Target Date Fund might not be fully diversified as one would be made to understand. It could be under weight International and Emerging Equities and over weight Domestic Fixed Income, particularly U.S. Government securities. Hence, please do you home work before you blindly start investing in any Target Date Fund.

2 likes | 
Flag |  May 16, 2013 near Appleton, WI

1|600 characters needed characters left
0 votes

Like any other financial product there are advantages and disadvantages to target date funds. To answer your question related to the diversification in these funds and whether or not it is sufficient, I would say that many target date funds will contain a reasonable amount of diversification as relates to the asset classes which are contained in the fund. There are downsides of these funds, however, one being that they are oftentimes invested in a single fund family and therefore do not provide much diversification from this standpoint. Another downside is that frequently the particular asset mix in the fund is determined by the investor time horizon only and does not take into account the risk tolerance, liquidity needs, or other aspects of the investor's financial situation. In summary, they are not customized to the particular needs of the investor except as relates to the time horizon. That being said, there are some situations where these funds may be appropriate, for example, in a small account where the investor can purchase such a fund and then not have to worry about the time and expense of re-balancing and reallocating the account themselves.

View all 4 Comments   |  Flag   |  Sep 20, 2015
Robert Wander, CFP®

For most employees, I think Target Date Funds are a fine choice. It's true that they are not all created equal. I prefer funds with a "Glide Path" that is designed "through retirement" as opposed to "to retirement." That is to say, assuming someone plans to retire at 65, that is not the end of their investing time horizon, just the beginning point of needing to generate income to replace employment.

Flag |  Sep 27, 2015 near Manhattan, NY
Robert Wander, CFP®

I wanted to add that most of the time, this is not the most important issue but rather the need to save more. The vast majority of people don't save enough for the future and are better off focusing on that area. Target Date funds remove the burden of managing your account yourself by outsourcing to a company that is in the business of handling this aspect.

Flag |  Sep 27, 2015 near Manhattan, NY

1|600 characters needed characters left
0 votes

Target date funds are nice because they're easy. But, they also have a fixed glide path. If you're near retirement, you may want to evaluate the bond positions in the target date fund, as we should soon be in a rising rate environment, which is bad for bonds.

Comment   |  Flag   |  Dec 11, 2015 from Orlando, FL

1|600 characters needed characters left
-1 votes

The closer you are to retirement, the more you will want guarantees. You get no guarantees from a target date fund. You could consider asking your employer after age 55 for an in service rollover distribution into an annuity with a guaranteed income rider. These are contingent on the ability of the insurer to pay. But this is true of any insurance product. So go to www.ambest.com and choose an insurer with a high credit rating in the A's, if you pursue this strategy. Never never never put all of your assets into any one type of investment. Diversify diversify diversify. See a certified financial planner to get an idea of a best fit portfolio for you as you get closer to retirement.

Comment   |  Flag   |  Apr 30, 2015

1|600 characters needed characters left
-1 votes

Target funds generally are well diversified. If I where you I would contact the employer plan and have them send you a breakdown of what the target fund is currently invested in and what fees are associated. Then review that with a financial professional so that they can give you an idea if that is going to get you to your retirement goal. It's all mainly based on what you want to happen at retirement age and what age that is for you. Everyone is different. Definitely start by finding out what the funds allocation is an fees.

Comment   |  Flag   |  Apr 30, 2015 from Boca Raton, FL

1|600 characters needed characters left