If you've not heard of target date mutual funds you probably do not have a 401(k) or you are in the early stages of the retirement planning process. No matter your reason for landing on this article, you came to the right place to find out if these retirement funds are a good choice for you and to learn how to narrow down your choices.
Are Target Date Retirement Funds a Good Fit for You?
Perhaps the greatest advantage of target date retirement funds is simplicity. By setting an appropriate asset allocation for a stated retirement date, and by slowly reducing stocks and increasing bonds over time, the target date retirement fund, in theory, does all of the asset allocation and investment selection for you. But the key phrase in this sentence is "in theory."
This is because there really is no "one-size-fits-all" portfolio structure. With many variables to consider, such as life expectancy, risk tolerance, and alternative or supportive investment savings accounts, the manager of any given target date retirement fund cannot know if the asset allocation and investment selection is, in fact, a prudent mix for any given investor. The fund manager can only use generalities and averages, which may or may not be appropriate for some people.
Understandably, many investors do not have the desire or the time to learn how to build a portfolio of mutual funds for retirement. Many investors are also confused about how to transition their asset allocation over time so that it is ready for retirement as the target date gets closer.
For example, conventional wisdom in the 20th century was that your bond allocation is your age and stocks are the remainder. Therefore, if you are 55 years old, you would allocate 55% to bonds and 45% to stocks. However, we are in the 21st century and now that life expectancies have risen to the mid-70's, a retiree needs to be careful not to get too conservative, too early.
If not for any other reason, the most ideal candidate for target date retirement funds is the person who has most or all of their retirement savings in one account, such as a 401(k) or IRA, and a person who does not have the desire, knowledge or time to learn about portfolio structure and strategies.
The Best Target Date Retirement Funds
The typical individual using target date retirement funds probably has no interest in researching the hundreds of choices available to investors today. Similar to selecting other mutual funds, the best target date funds will be those with a combination of below average expense ratios, moderate risk/reward profiles, broadly-diversified portfolios and average to above-average long-term performance. It is also wise to consider only target date funds that have at least 5-year performance records.
With that said, I give you the mutual fund families offering the best target date retirement funds that pass my selection criteria:
- Vanguard Investments: The king of low-cost index funds is a natural choice for the best target date mutual fund family. Not only has Vanguard been offering their target retirement funds for more than 10 years, they use their index funds as underlying holdings for each portfolio. Therefore investors using Vanguard target funds are assured at least "average" returns with broadly-diversified portfolios.
- Fidelity Investments: Similar to Vanguard, Fidelity has a solid selection of low-cost mutual funds and their Freedom Funds uphold that tradition. Fidelity has been offering target date retirement funds longer than most other mutual fund companies and their long track record illustrates their skill in building low-cost, broadly-diversified portfolios.
There are several other mutual fund families that offer target date retirement funds. An honorable mention here is T.Rowe Price Mutual Funds. They didn't make my cut because their portfolios tend to have higher concentrations of stocks in their allocations. This typically makes for greater performance, which can be a prudent goal in the early years of retirement saving, but the higher relative risk (and lower returns in down markets) may be too volatile for some investors with lower risk tolerance.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.