A “target-date” fund is a mutual fund consisting of typical assets such as stocks, bonds, cash or cash equivalents. The percentage mix of assets is reshuffled automatically by the fund to meet the objective of the investor by a certain future date, such as retirement.
The main advantages to a target-date fund are: low minimum investment which provides for greater diversification of outside investments, the fund is managed by a professional fund manager, and there is low investor maintenance or monitoring once the initial investment has been made.
As the preselected date approaches, a target-date fund will shift assets towards more conservative investments to avoid or attempt to mitigate any downturns in the economy. This re-allocation is done with no direction or input of the investor but by the mechanics of the fund itself.
When selecting a target-date fund, it is important to examine the initial composition of the fund assets. All funds typically have different percentage allocations based in equities or stocks, bonds, and cash. The difference between the funds rests in the make up of the allocations. One fund may be made up strictly of domestic equities and treasury bonds, while another fund may have a portion of the equities and bonds based internationally. There can be other differences among funds, such as what type of equities are in the asset mix, whether they are large, small or mid-cap stocks, or if the equities are from emerging markets, or the type of bonds and cash equivalents that make up a portion of the fund.
A disadvantage of a target-date fund is that they are not independent. The target-date fund is usually a compilation fund made from the offering company’s other funds. This compilation of other funds can lead to higher expense fees depending upon how a fund company computes their charges, the fee for managing the target-date fund may include all or part of the fees charged for the component funds. Hence the investor in the target-date fund is paying a fee for the cost of managing the component fund as well as the target-date fund.
Whether an investor should or should not invest in target-date funds depends upon how much the investor wants to be actively involved in the management of his or her retirement fund. If the investor wants to be an active participant continuously until retirement, then a target-date fund is not the best investment choice. Conversely, if an investor does not want to be involved in the direction or management then a target-date fund offers that convenience, however, the more passive investor will need to investigate, compare, and analyze the target-date fund before committing to invest in the fund in order to assure that the retirement goals will be met.
An investor must perform due diligence with any fund. With a target-date fund the diligence and investigation must be in depth and up front. With a more traditional self-directed fund the investor must continually monitor during the entire investment in the fund.