Target date funds are model portfolios that automatically shift to a more conservative allocation as the target retirement date approaches. However, they have some inherent risks and downsides. First, glide paths can differ greatly between fund families, leading to large differences in performance. For example, 2010 target date funds lost an average of 29% during the financial crisis. Second, target date funds usually have higher fees and limited fund choices to just one fund family. Finally, the asset allocations are static and cannot adapt to changing market conditions or opportunities in specific asset classes. It is generally better to have a customized, diversified portfolio that is actively managed and monitored.

1. TARGET DATE FUNDS: THE GOOD, THE BAD AND THE UGLY
One of the investment choices employees have to choose from in their Employee Retirement Plan are called
Target Date Funds. If your company offers Target Date Funds, we thought it was important you understand the
inconsistencies, pitfalls and inherent risks they impose. So what exactly are Target Date Funds? These are Model
Portfolios with an underlying basket of mutual funds that shift their allocation percentages on a ‘target date’ to
a more conservative model. So the farther away you are from retirement the more aggressive the
allocation…the closer you are to retirement the more conservative the allocation with assets shifting away
from equities and moving into fixed income and other safe investments.
Problem 1: Glide path conflicts
One of the inherent downsides to Target Date Funds is that the glide paths can differ greatly between
different fund families. That can be a significant problem, as witnessed with the 2010 Target Date Funds. Five of the
biggest funds lost an average of 29 percent from the start of the market fall in mid-October 2007 through March 9th
2009. The equity allocation in those funds had a broad swing, ranging from 28 to 79 percent. Imagine the
tragedy that befell those people who were at the precipice of retirement, only to lose one third of their
retirement account.
Problem 2: High fees and the same fund family
Not only are the fees in target date funds usually higher than in individual mutual funds, but most often you’re
stuck with one specific fund family and the quality of those underlying mutual funds be it good, mediocre or
bad or any combination there of.
Problem 3: Allocation cycles are static, based on Target Dates
That means if you’re allocated 20 percent in international funds and that sector is doing poorly, as it is now, you can’t
reduce your exposure. On the flip side, you can’t take advantage of a recovering or emerging asset class such as
real estate or gold fund.
If you’re one of those whose company offers Target Date Funds, you now understand why we do not use them.
It’s always smarter to have a customized, diversified asset allocation that’s managed and monitored, which is what
ReviewMy401k.com does for you.