As an advisor, I deplore Target Date funds. I think they represent everything wrong with investing. That said, they are better than the old money market, so kudos if you are using them in lieu of cash.

Target Date funds (TD funds) are built upon the premise of set it and forget it, but its a prettily packaged piece of poop. Most of the families I’ve met, have no clue how TD funds work. They can better explain the premise of a Large Cap fund than a TD fund. Do we want people to understand what they are invested in? More to the point, TD funds give no thought to risk at the client level. Perhaps there is guidance about the amount of risk a fund takes, but most families I’ve met have been told to pick the fund with the year that aligns with their retirement.

What do you suspect these families will do when the next collapse comes and they have double digit losses? As we already saw, these families don’t understand how the investment works. When it comes to an emotional decision associated with a market contraction, does a family have a better or worse chance of staying invested in the market when ignorant of the investment’s mechanics? I’ve seen plenty of families “set it,” but not many “forget it.” To make matters worse, a family’s asset allocation is automatically shifted toward a higher allocation of bonds with no thought to market conditions or a families situation. That isn’t how asset allocation is supposed to work. Again, granted, its better for the family to be in the market than not be in the market. However, in speaking with families, this strategy provides an illusion of safety.

However, on the upside, that family typically get to pay a higher fee for a poor service. Sigh.

The intent of the TD funds is excellent. As investment professionals, we want people to invest in the stock market long term. The execution of the TD funds is poor. Even more unfortunate, it could be argued that fund managers are pushing TD funds to get for higher fees.

If the goal is greater investment from your employees. Set up auto-enrollment with annual step ups.

If the goal is greater diversification of investment have your TPA create a simple questionnaire and create an automated QDIA based on an employees’ risk.

TD funds were created in the 90’s, before retail based automation was available. This allowed a commercial based application of automation to be effect. Two decades have gone by. We can and should do better for every day people.

Don’t assume TD funds are all they are cracked up to be and don’t play chicken with your nest egg.