Avoid Target-Date Retirement Fund Traps

What you don’t know about target-date funds can hurt you

Note: This article contains affiliate links. I may receive compensation if you click on them. Thank you for your support.

When your to-do list is already a mile too long, it’s tempting to go the easiest ways to get things done. That’s especially true when it comes to financial matters – like retirement savings – that seem complicated.

That’s why so many single moms go with the hands-off, no-worries choice in their retirement plans: target date retirement funds. The whole point of these is to pick one, then ignore it until you’re ready to retire.

But going all-in on a target date retirement fund can have devastating effects on your financial future… especially if you choose the wrong one or use this tool the wrong way.

So while it takes a little more work to create your own retirement portfolio, for most single moms putting in that extra work will be well worth your time. You are not everybody else. And a one-size-fits-all retirement fund won’t fit you as perfectly as one that’s designed just for you.

Learn more about saving for retirement in my book Retirement 101.

Target-Date Funds Are Everywhere

If you have a 401(k) or other retirement plan through work, your investment choices probably include target date funds. In fact, according to the Investment Company Institute, at least 80% of 401(k) plans offer target date funds.

Here’s how target dates funds work. Just like regular mutual funds, these hold a boatload of different investments. Where they’re different is that they focus first on asset allocation, the mix of different types of investments such as stocks, bonds, real estate, and cash. Each target date fund follows its own “glide path,” a preplanned schedule to rebalance the portfolio to reduce risk as the target date gets closer.

Sounds like a great idea, right? That’s exactly what you would want to do if you were managing your retirement investments yourself.

But target dates funds have a dark side (and not the good kind).

These simple “set it and forget it” funds come with some big trade-offs, including super high fees (on average), especially compared to index funds and ETFs. And if you don’t use them the exact right way – and many people don’t – they can actually crash your worry-free retirement.

5 Things People Get Wrong About Target Date Funds

It’s probably obvious that I don’t like target date retirement funds, and I have good reasons for that. The main one is that they give people a false sense of security – and that just makes me mad.

But because they’re the default choice in many 401(k) plans… because they seem so easy to deal with… millions of people get stuck with these funds that aren’t really right for them.

Here are the biggest things people get wrong with target date funds:

1.  It seems like investing in target date retirement funds ensures that you’ll have enough money to retire with on your target date.  That is 100% NOT TRUE.

2. These funds are NOT risk-free.  Just like any other fund, target date funds may suffer substantial losses or not grow enough to support a worry-free retirement.

3.  People include them as part of a retirement portfolio along with other investments. That’s not how they work. They’re designed to be the only investment in your retirement account.

4.  People buy more than one target-date fund… sometimes as many as 4 or 5. That also undermines their effectiveness and your financial future.

5. Different target dates funds with the same target date do not hold the same investments or follow the same glide path. It matters which target date fund you choose.

Building Your Own Retirement Portfolio

No matter what you invest in, there’s no guarantee that you’ll have enough money to retire. But there are a lot of things you can do to maximize your retirement account’s performance… if you DIY.

And you can absolutely do this without breaking your brain. You can put together your own mix that will get you from where you are now to where you want to end up.

Here are some very simple things you can do to grow a substantial retirement nest egg.

First, choose very low or no fee funds. Target date funds tend to be much more expensive – sometimes 5 or 10 times more! – than index mutual funds and ETFs (exchange-traded funds). Those high expenses eat into your earnings… and slow down your nest egg’s growth.

Second, start with very broad index funds that give you total investment coverage. You may be limited by the choices offered in your 401(k) plan…but that doesn’t mean you’re stuck. You can (in most cases) create your own IRA (individual retirement account) alongside your workplace plan and invest that money in a much broader range of investments. Plus, as you learn more about investing and get more comfortable and confident making your own investment choices, you can branch out to include narrower niche and specialty funds… and even individual stocks.

Third, you can control your nest egg’s “glide path” based on your personal financial situation, risk tolerance, and market conditions. Rather than being stuck in a cookie cutter portfolio, you can make sure that your investments match your plans.

Fourth, work with a trusted financial navigator to “tune-up” your retirement portfolio by helping you:

  • set and clarify your retirement goals
  • measure your portfolio’s progress toward those goals
  • uncovering hidden expenses that can drag down earnings and growth
  • keep your portfolio stays on track for your planned retirement date
  • rebalance your asset allocation as you get closer to retirement

Finally, check in with a fee-only investment advisor, even if it’s only once or twice. They can suggest specific investments that can help you reach your retirement goals. A one-time consult with a fee-only investment advisor won’t drain your retirement portfolio nearly as much as decades of ongoing high fund fees (in case you were wondering about the cost).

Click here to contact me about Retirement Tune-Up services.

If You Decide to Go With a Target Date Fund, Do This

Target date funds aren't right for everyone, but they might be right for you. So if you choose to invest in a target date retirement fund, do it the right way.

  • Choose one target date retirement fund.
  • Pick a target date that’s at least 10 to 20 years past your planned retirement date.
  • Make it the only investment in your retirement account.
  • Look for the fund with the lowest possible fees.

Bottom line: You need to make the best choice for you, whatever that is. As long as that choice includes putting away some money for retirement.

linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram