As seen in

The Downside to Target Date Funds – Presented by Mark K. Lund, Financial Advisor in Utah

Financial Advisor UtahLegendary infomercial pitchman Ron Popeil wasn’t just the inventor of the Chop-O-Matic, the Pocket Fisherman, and Mr. Microphone. He was also the creator of one of the greatest slogans in marketing: “Set it and forget it.”

He used this tagline to sell his Showtime Rotisserie & BBQ, which moved more than 8 million units in the U.S. alone.1

Popeil understood that even more appealing than his countertop roaster’s ability to make delicious food, was its autopilot feature. Once you put in your chicken, you didn’t have to think about it again until it’s done.

The appeal of “Set it and forget it” is why many people have chosen to save for retirement by investing in Target Date Funds (TDFs). Essentially, you pick your target retirement date and the fund automatically does the rest, adjusting things like asset allocation and risk exposure in the appropriate range for your age.2

Because of this seemingly autopilot feature, TDFs have grown in popularity. In 2007 just a quarter of retirement savers used them. But by 2019 that number had grown to 60%. And today nearly 90% of company 401(k) plans offer the option of TDFs.

At first glance these funds might seem like a great idea. When everything about your retirement investing is programmed to be handled automatically, you don’t have to give your nest egg a second thought. But unfortunately, things don’t always end up working the way they were designed to. And these funds have been getting more critical scrutiny, including a class action lawsuit on behalf of unhappy investors.

Target Date Funds have several potential drawbacks. The first is that segmenting investors simply by age (or years to retirement) is not a very precise way to plot an investing plan or measure an individualized risk profile. No two 40-year-olds are exactly alike. Not only will they differ in fundamental things like income, cost-of-living, and life goals, but they will most likely not have the same retirement age. For most people, 25 years in the future seems remote. And so they just pick the suggested retirement age of 65.

The other significant problem with TDFs has been their handling of risk. Because a loss in the years immediately before retirement is likely to have the biggest negative impact, these funds are designed to proceed along a “glidepath” where exposure to stock risk gradually decreases as the retirement date nears.

Unfortunately, this is not what has been happening with some of the most popular TDFs. Rather than controlling risk as promised, these funds were experiencing losses at or above what the market experienced as a whole. As a result, many have joined the class action lawsuit against the funds’ management companies.3

The idea of simplifying or automating some parts of investing has merit. For example, setting up your retirement contributions to be automatically withdrawn each month. But because each investor is unique, a one-size-fits-all plan based on an estimated future retirement year may not work as well as a target risk approach in the long run.

Because life is full of unexpected changes, the prudent investor will enlist the help of a trusted advisor, communicating regularly about their ongoing plan. The advisor will not only help them navigate the ups and downs of an unpredictable market but will also hold them accountable each step of the way.

If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.

Regards,
Mark Lund
Stonecreek Wealth Advisors, Inc.
11576 S State Street, Bldg. 1002
Draper, UT 84020

Sources:
1. http://go.pardot.com/e/91522/wiki-Ron-Popeil/936fln/1921434649?h=YQSajg8vCCFUoibxDSXdnnnU340sU6j0UyRzwoFUzQo
2. http://go.pardot.com/e/91522/arget-date-fund-pros-and-cons-/936flr/1921434649?h=YQSajg8vCCFUoibxDSXdnnnU340sU6j0UyRzwoFUzQo
3. http://go.pardot.com/e/91522/the-target-date-fund-industry-/936flv/1921434649?h=YQSajg8vCCFUoibxDSXdnnnU340sU6j0UyRzwoFUzQo

Disclosure:
This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by Efficient Advisors, LLC (“EA’) for Mark Lund, Mark is a Financial Advisor in Utah. He is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment management and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Effective Investor Newsletter. Cities served in Utah are: Salt Lake City, Salt Lake County, Utah County, Park City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, American Fork City. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

Book a Free Consultation

To Begin The Proces Simply call or Click "Let's Begin"

Once you schedule your free initial consultation, we will send you a short First Appointment Questionnaire. The First Appointment Questionnaire gives us a brief overview of how you envision retirement, your current situation, and your investment experience. When we meet, we will clarify how you measure success and what’s most important to you about your money. It’s that simple!

Enjoy retirement as you’ve always envisioned

We’re here to help, no matter where you’re starting from!

Contact Us

© 2024 Stonecreek Wealth Advisors, Inc. A fiduciary, independent, fee-only, Registered Investment Advisor

Scroll to Top