Target Date Mutual Funds – Why I hate them and you should, too

This is Jeff Rose, goodfinancialcents.com.
Today I want to talk about something that
I absolutely hate, target-date mutual funds.
What are they? If you have a 401K then you’ve
probably seen them. These are the mutual fund
or investment options that you’ll see that
have the year after it. For example, you’ll
see target date 2040, or target date 2025.
Essentially what you are doing is choosing
an investment strategy that resembles the
year that you expect you will retire. Let’s
say you plan on retiring around the year 2040.
You would then chose that target-date fund
and you set back and let it do its thing.
As you get closer to that year of retirement
that target-date fund will generally get more
conservative, hoping to protect what you’ve
accumulated to that point in time.
So why do I hate them? Why did I use such
a strong word? I’m usually not that aggressive
as you’ll see in a lot of my other videos,
but I’m just not a big fan and here’s the
reason. When you actually look at these target-date
funds, typically these are structured to where
you have anywhere from 12-18 different mutual
funds in this one target-date fund. So yes,
you are diversified. If you actually take
those funds on an individual basis and start
breaking them down and seeing the fees associated
with them, their performance and all the other
components that make a good mutual fund, typically
in my experience you’re going to see maybe
seven decent funds in those target-date funds.
The rest of them are just crap, pure crap!
There is no way on an individual basis that
you would ever put any money in those mutual
funds, but you don’t see it because it is
wrapped in this target-date fund.
Just here recently I have several clients
come to me that had these target-date funds
and in their 401K they had other options.
They had several options. Instead of choosing
that one default target-date fund, if they
would’ve done some research and done the a
la carte method, as I like to say where they
individually pick the mutual funds they have
in their own 401K, we were able to show them
how they could increase their performance
sometimes 1-2-3% and in one case 4% more than
what they got over the last several years.
Even more so they were able to decrease their
risk. We use a term called beta to measure.
I don’t want to get too technical here, but
anytime that you can reduce your risk and
generate more return, isn’t that what we want
to do? That is just what the target-date funds
don’t do. Yes, you have to do your own research.
Yes, you have to tweek it as you get closer
to that retirement, but if you’re getting
that much more return why wouldn’t you do
it? If you aren’t comfortable doing it, why
not hire a financial planner to do it for
you so that way it takes away you having to
do the research? You’ve got a professional
to help you out.
That is why I do not like target-date mutual
funds. I have a blog post that is going with
this video that actually shows you the real
returns of the target-date funds versus the
a la carte method that we were able to do.
Check out the returns. If you have any questions,
Good Financial Cents is where I’m at. That’s
where I’m at, so come check me out. We’ll
talk to you soon.
The opinions voiced in this material are for
general information only and are not intended
to provide specific advice or recommendations
for any individual. To determine which investment(s)
may be appropriate for you, consult your financial
advisor prior to investing.