While these retirement plan options do indeed make long-term investing easy, I do caution my clients that these funds are anything but simple, and my not really serve the purpose to which they are intended. Here's why:
- They are exceptionally complex products. Each target-date fund comes with its own set of fees, risks, and mix of assets. Comparing funds against one another is cumbersome task that requires a full understanding of each differentiating factor. Measuring performance between funds is even harder.
- They are typically too generic to meet your needs. Because these funds do not account for risk tolerances, they typically do not reflect the optimal asset mix. Because they lack flexibility, these funds tend to underperform more constructive and customized retirement portfolios crafted to meet your unique needs.
- They are expensive. With an average target-date fund expense ratio of 0.70 percent (Reference), investors should seriously consider return erosion, or the impact that fees have on returns. As noted above, many of these funds will lag the long-term results that can be achieved with a more individualized portfolio. The added fees of these funds widen the gap.
Most investors select these target-date funds through their employer-sponsored 401(k) plan without ever considering the points noted above. Be sure to do your diligence and resist selecting a life-cycle fund just because it's easy.
If you need any help analyzing your options, feel free to contact me.
Jason M. Gilbert, CPA/PFS, CFF