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Lifecycle Funds are a Terrible Investment Idea

Written by Neal Frankle - 36 Comments

Lifecycle Funds are a Terrible Investment Idea

Lifecycle funds (also known as target date mutual funds and ETFs) are marketed mostly as a solution for folks who want to achieve a financial goal by a specific time. The most popular are those are structured for people planning on retiring, but they have also become popular in 529 college savings plans, too.

Lifecycle retirement funds manage your asset allocation such that the mix of assets becomes increasingly conservative as you get closer to retirement. Most 401(k) plans offer these funds because they don’t want the responsibility of helping you make good decisions on your own.

In truth, the plan administrators don’t really care if these investments work. If they did care, they wouldn’t be offering them to you. Investors often choose these funds because they don’t know any better, and because it seems like an easy way to reach their goals without too much work. It is easy, but it won’t help anyone reach their goals. Lets take a look and see why.

Let’s say you are 50 years old now. While you’d like to retire now, a more realistic plan is to retire in 15 years, and you’re hoping to become a millionaire by the time you collect your gold watch.

Since it’s 2011 now, you might buy a 2025 target date or lifecycle fund (such funds are typically targeted at years ending in 0 or 5). The fund might have 50% or 75% in equities now. Each year, little by little, the manager will shift assets into bonds over the following 15 years. What a stinky idea. Why is this such a terrible move?

1. Costs

Target date funds have a lot of hands-on management. As a result, the expenses are higher than for standalone mutual funds. Guess who pays those high costs? You, that’s who. Since expense ratios are recognized as the best predictor of mutual fund performance, you shouldn’t take this point lightly.

2. Limited choices

Lifecycle funds usually only tap into the funds of one fund family. Very few fund families excel in all areas. You may be better served by selecting the best funds from multiple fund families. Why restrict yourself?

3. Performance

During the 2008 market debacle, lifecycle funds – which were supposed to protect people who were about ready to retire – didn’t do the job. In many cases, these funds suffered just as much as full equity funds.

4. Wrong timeframe

This is perhaps the most important reason why you should stay away from these funds. Here’s what I mean… Recall the example above. You buy a lifecycle fund when you are 50 and the fund “matures” when you are 65, coinciding with your retirement date. At the time, many of these funds will be invested almost entirely in bonds.

Unfortunately, that just doesn’t suit your needs. Just because you hit 65 doesn’t mean you don’t need the money to grow. Quite the opposite, at 65, you might live another 25 or 30 years. That’s your timeframe. Whether or not you still have a job, your money has to keep working.

Note from Nickel: I just checked the Vanguard Target Retirement 2010 fund, and it’s currently holding a roughly 50/50 mix between stocks and bonds, which might actually wind up being too aggressive for your tastes (if you ascribe to the “age in bonds” rule). For comparison, the Target Retirement 2005 fund has 35% in equities.

In my opinion, lifecycle funds are yet another Wall Street invention that sounds great on paper but just doesn’t deliver. They’re not good for your 401(k), and they’re not your best IRA investment choice either.

But don’t despair. You have great options. Remember, you need to invest over your lifespan. Your timeframe may be much longer than you realize.

Develop a balanced portfolio

Developing a well diversified, balance portfolio is perhaps the best approach to investing, and it’s what lifecycle funds try to replicate. Your portfolio should be made up of a mix of equities and fixed income instruments. Importantly, this allows you to control the mix of investments, so you can be sure it matches your needs and risk tolerance.

Sure, your portfolio will move up and down in value, but short term fluctuations really don’t matter. What you care about is having an investment mix that will make your money last a lifetime. To do that, you’ll need healthy dose of equities even after you retire.

Add some real estate

Real estate is another fine idea. Prices and interest rates are very currently very low. While I don’t recommend buying real estate in your IRA (even though you can do it), you can make great investments for retirement income outside of your retirement accounts.

Real estate might just fit your needs. Over time, the value of your property will increase, and so will the rent you receive. And you don’t necessarily have to manage the property yourself, as you can hire a property manager to do the dirty work. Just do your homework so you’ll know what you’re getting into.

These are just two alternatives to building an investment portfolio. What other options would you recommend? Have you had better experiences with target date funds?

More notes from Nickel: As I’ve noted in the past, I’m not a fan of target date funds, either, but my reasons are a bit different. For one thing, they’re prone to performance chasing – e.g., Vanguard re-worked their funds in 2006 to reduce bond exposure in every fund with a 25+ year time horizon from as high as 24% to just 10%. Great timing, huh?

I’m also not crazy about the “glide path” that these funds use. To get an appropriate allocation right now, I’d have to choose a less distant target date, but then it gets too conservative too fast.

Finally, you have no control over asset location with target date funds. Unless your investments are entirely in tax advantaged accounts, you lose tax efficiency with these funds because you’ll end up with a portion of your bonds being exposed to taxes. You’re better off splitting things up and holding your tax inefficient investments entirely within tax sheltered accounts.

Published on February 3rd, 2011
Modified on February 5th, 2011 - 36 Comments
Filed under: Retirement, Saving & Investing

About the author: is a Certified Financial Planner in Los Angeles whose goal is to help people improve their finances and find balance in life. He covers these topics at his personal blog Wealth Pilgrim.

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36 Responses to “Lifecycle Funds are a Terrible Investment Idea”

  1. 1
    Nate Says:

    While I agree with the overall theme of double-checking and looking deeper into one’s investments, I have to take issue with some of the things that you’ve mentioned here…

    Regarding Costs – Many Life Cycle funds are comprised primarily of index funds. As opposed to actively managed funds, index funds have lower expense ratios. One of the ones I use has an expense ratio well below 1%, and I’ve got one of the agressively allocated funds (target date is WAY off in future). If this is “the best predictor of mutual fund performance,” then I don’t think this is that much of an issue, as long as you shop around and do your research.

    (If the fund IS invested in Index funds, then it could be better than being invested in actively managed funds. Lower expenses with just as good of a chance of meeting broad market performance.)

    RE: Performance – Equities were hammered across the board in the most recent market plunge. You even allude to this in your post. What equities should these funds have been invested in to avoid this downturn? Again, most of them are based on Index funds that are designed to follow general market funds for the given sector, etc… To find fault with these funds because they happened to follow the market is to not understand these funds. They’re designed for automated diversification based on age, not for avoiding market participation. If people need that insight, then fine. But then again, maybe the point is to do the research.

    This is not to say I totally disagree with everything you’ve said. While some fund companies can have a better reputation than others, being invested in just one (which is what the typical Life Cycle fund represents) is eliminating a diversification method right off the bat.

    But let’s not forget that, like every investment, there is a person or group that it will likely benefit, as long as they’ve done their research and are comfortable with the real risks and rewards that they bring.

  2. 2
    BG Says:

    Wow, never thought I’d read an attack on Target Date retirement funds. I don’t think the use of the word “Lifecycle funds” is correct, as my 401k has ‘aggressive’, ‘moderate’, ‘conservative’ life-cycle funds that stay that way forever. Target Date Retirement funds get more and more conservative over time (as the retirement date nears).

    Let’s take my favorite: Vanguard Target Retirement 2045. Expense ratio is 0.19%, so costs are one of the lowest around. Asset allocation is 65% total stock market index, 25% total international stock index, and 10% total bond market index.

    In 10 years, the 2045 retirement fund will look exactly like the 2035 retirement fund does today. If you want to be more aggressive then invest in the fund with a further out date (and vice versa if you want to be more conservative).

    In 2008, the Vanguard 2010 fund lost HALF as much as the Vanguard 2045 fund, so it does a very fine job of becoming more conservative over time to protect assets as you near retirement (everyone lost money in 2008).

    My point: the vanguard target retirement funds are top notch and automate all of the best-practice knowledge that financial planners talk about: diversification, low costs (well, most FAs don’t talk about costs), age-appropriate asset-allocation, indexing, re-balancing, etc, etc. And it is all AUTOMATIC.

    Seeing your attack on Target Retirement funds seems to me like a rank against all of the financial wisdom that has been preached to us for decades.

    Sorry, I just don’t get it. I think these funds are very sound investments (and should be the defaults in most 401ks).

  3. 3
    Shawn Says:

    I think the more important point is that actively managed funds very rarely outperform index funds in the long run. So if someone is invested in a target fund such as the Vanguard 2045 fund above, It’s difficult to find fault with that plan.

    However, the vast majority of employees don’t even look at expense ratios or whether a fund is actively managed or follows an index. As a result, many people get nailed with expense ratios on their actively managed funds (i.e. Fidelity Freedom Funds). Unfortunately, a lot of company sponsored 401k’s offer such a poor selection of funds, that target funds are often the better choice. I currently follow the 3 fund portfolio, which basically works like Vanguard Target Fund allocating between Total Stock Market Index, Total Bond Market Index, & Foreign Markets. The only advantage over the Target fund is you have more control, which is nice if you are in a position to take more risk even nearing retirement.

  4. 4
    Kevin R. Says:

    I would take an exception to the use of term “terrible investment idea,” I’d reserve that for putting one’s hope in a few personally chosen stocks or maybe investing in some “‘hot’ real estate deal’ (thinking Groucho Marx, either in the film The Cocoanuts or ironically real life).

    I think Lifecycle funds are for the financial unsophisticated – much like I was and still am in many ways. I think companies offer this selection of products tailored for what the customer wants (which is probably wants the sharp curve of equities growth then panic to be conservative right near retirement). I think many an uneducated consumer maybe very happy with the product and in the end the fund did not really take advantage of anyone {overhead costs justified, thus the customer pays for services}. The consumer is left with in fairly ’safe place’ at the end, maybe not for ’70’s style inflation, but overall in a safe place.

    Gaining a tad more sophistication, I think it’s wise to choose other funds these companies offer and rebalanced your own portfolio. I can’t say it unwise for many Americans to invest in these funds. I can think of many other things the unstudied could invest in that could yield terrible results.

  5. 5
    Nickel Says:

    BG: I tend to agree that Target Retirement fund are a good starting point. In fact, we started out with them in our Vanguard IRAs before we had much money. Besides, at that stage, the amount you’re saving is much more important than how you’re investing it.

    One thing that I really dislike about these fund, as I stated in my “notes” at the end of Neal’s article, is that they seem to chase performance – even Vanguard is guilty here. Because mutual funds are often rated based on returns, there is a tendency to want to make them more aggressive during the good times. This is primarily a sales tactic, and it’s not necessarily good for the individual investor.

    Take, for example, the switch from as much as 24% bonds to 10% bonds in all of Vanguard’s TR funds with a 25+ year time horizon back in 2006. If you have 25 years until traditional retirement age, then you are 40 years old. Using Jack Bogle’s rule of thumb (age in bonds), you should have 40% in bonds. Even using the more aggressive “age – 10″ or even “age – 20″ as your percentage in bonds, these funds are simply too aggressive (imho).

    Needless to say, I was very disappointed in Vanguard for making this change. Sure, it was probably good for business (for awhile), but those whose allocations were unwittingly changed paid the price in the ensuing bear market.

    It’s also important to keep in mind that we’re talking about the best of the best when looking at Vanguard funds (again, imho). In many 401(k) plans, you don’t have access to the best, or even good, funds. I’m guessing that Neal is mostly railing against these “other” funds – though if you only have crappy TR funds available, then your other options are probably equally crappy.

    As I noted above, as your portfolio grows, the use of TR funds may also force you to hold bonds in taxable space, which is bad news from a tax efficiency standpoint.

    Oh, and as far as costs go… Once your portfolio is large enough, you can use Admiral funds (at Vanguard) and cut your expense ratio about in half relative to the TR fund. Whether or not that extra 0.1% or so is worth it to you depends on your situation, but it is a difference.

  6. 6
    Nate Says:

    @ Shawn – You mention that one of the advantages of your 3 Fund Method is that you have more control than if you were to invest in a Target Date Fund(TDF). But that isn’t entirely true. As long as you understand what the TDF is invested in, you can still tweak your overall investment if you don’t think the TDF meets your needs.

    Say you think you need more exposure to emerging markets… Add an emerging markets index fund to bring your total allocation (including whatever may already exist within the TDF) to what you desire it to be.

    I don’t think you lose any control, whatsoever, by investing in TDFs. Even in comparison to other strategies. It’s still just a question of research and being comfortable with the inherent risks/rewards of any investment that you are in.

  7. 7
    Storch Money Says:

    For people seeking a diversified, low-expense portfolio consistent with Boglehead principles, the target date funds that are available in 401k plans probably rarely make sense. At least the ones in my 401k plan don’t.

    But for the millions of people who might otherwise not contribute to a 401k plan at all, or would just leave everything they contributed in some undesirable default fund, target funds might be a great idea.

    The people who are interested enough to seek out personal finance blogs probably fall much more into the first category than the second.

  8. 8
    BG Says:

    #7 Storch) If your 401(k) doesn’t have Vanguard Target Retirement funds, then I’d be raising h3ll!

    But, you (and others) are right on the money that not every target retirement fund family are equal. Fidelity’s version are higher cost actively managed funds, for example. Other fund families have more aggressive stances.

    Nickel) I remember getting mailers from vanguard about the bond changes. We were doing similar to what Nate was saying and using the target fund as a core, and getting more aggressive using other funds specifically because of the large bond holding they used to have.

    I guess the question is: for a 2045 fund (34 years out): what should the bond allocation be? The old 24%, or the new 10%? I think the new 10% bond allocation is ‘more correct’.

    I agree with others here too: read & understand the prospectus, compare them, and then make a decision to invest. Use other funds to tweak the holdings to be more aggressive or more conservative (or get REIT, commodity, and other exposures that the core fund may be lacking).

  9. 9
    jim Says:

    I think its a little too early to declare the entire category of funds to be a failure based on performance. Most of them have only been around a few years.

    The Vanguard funds seem better than most and I don’t really see anything wrong with them. The expense ratios are low and they’re just a simple mix of index funds.

    I do agree that many of the target date funds are pretty bad with high fees and poor performance.

    Some of the 2010 – 2020 funds have more stocks than I like but I’m not as aggressive when you get closer to retirement. For people who want less risk they can just pretend they’re older when they buy the fund. i.e. buy a 2020 fund even though your retirement is actually 2030.

  10. 10
    krantcents Says:

    I agree! I have looked at target date funds and I am not impressed with the returns. The dates did not seem to match my needs either. I will stick with my asset allocation and maintain my long term financial goals independently.

  11. 11
    Brandon Says:

    The expense ratio on my 401k Vanguard Target funds are all 0.17-0.19% while most of the other funds available in my 401k are 0.50-1.21%. That said, things I have read imply there is a ‘hidden’ expense ratio in that the target fund is paying expenses to the underlying funds. Does anyone know if there is truth to that?

  12. 12
    Ethan Says:

    @Brandon: I don’t recall all the details, but I looked into this issue a while back and found there to be no hidden fees in Vanguard’s target date funds. I believe you’ll find several discussions about this over on the Boglehead’s forums.

    In some sense, talking about target date funds as a group is useless, like talking about ETF’s as a group. It’s just a label, and a lot happens under that label. I’m disappointed there aren’t better allocations available, or even brokers that will let you automate your own target date portfolio using rulesets. But nevertheless, if I had two minutes to give a beginner all the advice they were ever going to get on retirement savings, I’d tell them to buy a Vanguard target date fund and never touch it.

  13. 13
    Neal Says:

    I believe that Nickel sums up my view of target date funds –Vanguard is probably one of the best and not available to everyone.

    Target Date funds were investigated by Congress precisely because they held themselves out as becoming much more conservative as folks approach retirement ( which is mistake for most pre-retirees and I’ll write about that later) but many didn’t even do that and that’s why investors got creamed. There is nothing wrong with an equity fund dropping with the market. But when you are sold a fund that promises NOT to be strongly co-related w/the market, you should get what you paid for. Many target funds didn’t deliver.

  14. 14
    Shawn Says:

    @Nate: That is true and certainly an option, but as Nickle mentioned these target funds often modify allocations based on the current state of the market. This is not efficient and not the methodology I like to follow. The whole advantage of the target fund is ability to take a hands off approach and never have to re-balance your portfolio. If you are constantly having to buy/sell or rollover funds to offset the allocation changes made by the target fund it seems inefficient. Not saying it can’t be done, but it wouldn’t be my choice.

  15. 15
    BG Says:

    Neal) I think a lot of the problem is that there is no firm SEC style definition of what a “Target Retirement Fund” is or is not. Companies can stick that label on any investment.

    Shawn) As far as I can tell, Vanguard has tweaked their retirement funds _four_ times since they were created in 2003.

    The four changes were: 1) decreasing bond exposure, 2) increasing international exposure, 3) simplifying the multiple international funds into a single ‘total international index’ — so now it includes Canada, and 4) including international small caps as the forth change.

    And technically, changes 2,3,4 all happened simultaneously (when the multiple international funds were replaced with the one ‘total international index’) — but they are big enough changes that I split them apart.

    Compare Vanguard’s Index style (averaging 1 change every 2 years), to that of a fidelity-style actively managed TR fund that likely makes changes 4 times a day (or at least the actively managed funds that the Fidelity TR holds are changing daily).

    I don’t see the Vanguard TR funds being a bastion of ‘performance chasing’ since the fund changes are quite rare, and normally have no changes in any given year (aside from the pre-published asset-allocation schedule).

  16. 16
    Maria Says:

    This article would have been more useful with fewer blanket statements and more guidelines. The expense ratios for the funds offered through my employer’s 401(k) plan are *lower* for target date funds than for the index funds offered. How does that make the target date fund “terrible”?

    This sort of sensationalist headline does attract my attention, but it turns me off from reading your other articles.

  17. 17
    BG Says:

    Maria) What I’m gathering is that there are a bunch of terrible 401(k) plans out there with funds that just rip you off. Luckily, my 401(k) has over 300 funds to pick from, including both the Vanguard and Fidelity TR funds.

    I’m not sure what I would do if my 401(k) choices were limited to a handful of crappy, high feed, funds…

  18. 18
    Luke Says:

    krantcents-

    You are not impressed with the target retirement returns? Can you elaborate a little more on that. What has impressed you with returns within the risk band for a target fund?

    The dates didn’t match your needs you say? They run the gamut from 90% stocks to 25% stocks using Vanguard TR funds. I guess you don’t fall into this wide net?

    If you want to retire in 2045 but feel you are a little more conservative, nothing is stopping you from buying the 2035 fund. It is just a name.

    Ethan-

    Vanguard doesn’t layer in their expense ratios.

    My two cents :o ) Target Retirement funds are fantastic in that they are professionally managed for return, allocation and tax consideration. Using Vanguard as a perfect example, you need $3000 to get started and are diversified! How easy could that be? No transaction costs to the investor, no need to rebalance quarterly/annually. A set it and forget it investment.

    Fidelity’s offering is a fund of crap from the bottom of the pile. I do think there are a handful of miserable choices out there among Target funds, but the bad don’t outweigh an amazing choice like Vanguard. Also, the problem the SEC had is with the naming of the funds. People buy the fund and think it is guaranteed on the date they retire. I think the bigger problem is investor education, not the product.

    And I use Vanguard TR 2045 and have small cap value and REIT’s among others. TR 2045 is a core holding for me and I can add additional funds IF you want to slice/dice a little. If you don’t, then just buy a single fund. Leave it to the investing public to mess up a great idea.

  19. 19
    Michael Harr @ TodayForward Says:

    Couldn’t disagree more with the post. These funds are no better or worse than other fund or managed portfolio options available in the marketplace. In addition, the average investor is horrific in managing their portfolios which has been studied about as much as the fat content in a Big Mac.

    Each investor needs to do their homework and find a portfolio that works for them. These funds and their underlying investments can be analyzed just like any other portfolio. If you blindly purchase a target date/lifecycle/give-it-a-name fund without doing the homework, then you will get whacked – the same is true for putting a portfolio together piece by piece.

    In addition, you must remember that the top three 401k options that participants chose prior to target date funds were cash, company stock, and bonds. Another way to put it was they chose the lowest risk, lowest return option followed by the highest risk option, followed by the second lowest risk option. Didn’t make any sense and therefore target date funds came into the spotlight as default options.

    While they have many downfalls, the ultimate problem has nothing to do with these or other funds. It has everything to do with the fundamental lack of investment education given to American consumers. There will never be a perfect investment…ever.

    Do we blame the gun for a murder?

  20. 20
    Aaron Says:

    I’m currently invested in Vanguard Target Age Retirement funds in my IRA, and I’m looking to move out of them soon to lower my expense ratios, but I also chose NOT to invest in Target Age funds offered in my employer’s 401k due to higher costs. Some of the criticisms in this article are fair comparably speaking, but I think this article has no sense of perspective whatsoever.

    Almost every single criticism above fails to address IMO the entire point of the funds – they’re mainly for beginners!

    Two reasons they can be very beneficial for beginning investors:

    1. Instant diversification. If you want to invest in Vanguard as an example within an IRA, you usually need $3000 to start investing in a fund. True, ETF’s could be a potential workaround, but then again, if you don’t understand or bother to look at expense ratios, what are the odds you understand the cost of investing in ETF’s is the number of transactions you make buying and selling? Bottom line is these funds make it easy to start from the very beginning of your investing to be instantly diversified. What’s worse, slightly higher expenses, or little to no diversification? I’d rather be diversified.
    2. Overcoming the fear of beginning to invest – I’ve lost count of how many personal finance blog authors wrote about how they made terrible mistakes when they first began to invest, such as in individual stocks, etc. before they finally learned their lessons, often after their individual stock choices tanked. I don’t care if the expense ratio was 2% on a target age fund that was actively managed – I’d rather pay 20X the fees than lose my shirt picking individual stocks when I have no idea what I’m doing as a beginning investor. Most people who chose these funds to start like I did, or even stick with them, are often people who know of others who lost their shirts playing the market, but also want to get invested. Honestly, even once they figured out how to roll their own portfolio, and determined how much more they had paid in fees over the years instead of doing that all along, do you honestly think that’s comparable to mistakenly buying individual stocks instead of index funds or not being invested at all?

    It’s like being highly critical of people who begin riding bikes with training wheels – seriously?! Even if someone there on continues to use the training wheels – what’s worse? Not riding a bike at all, or at least riding it with training wheels?

    I’m sure there are indeed totally crap Target Age Retirement Funds, but I don’t dismiss all mutual funds just because some are bad.

    Terrible investment ideas are not investing in index funds, not diversifying, or choosing to not invest at all when you had the ability to do so. Choosing Target Age Retirement funds I would describe as good, but not optimal.

  21. 21
    Shawn Says:

    #5 Nickel – Also worth noting that as of October 2010 – Vanguard’s Admiral Shares lowered their minimum from 100k to 10k on index funds. For many investors that gives that extra 0.1% lower expense ratio a lot more time to compound over our investing lifetime.

  22. 22
    Jeff Says:

    As an adviser, I come across a number of people who have age/risk based funds offered in their 401k. Typically we recommend against these “lifecycle” funds since they are generic recommendations. The fund isn’t specifically tailored to that individual’s situation. Instead, the fund assumes everyone retiring in X years has the same risk level and investment objectives. There might be two people that plan to retire in 10 years but their goals might be different. Or, one started contributing when they were 20 while the other waited until his/her 40’s to start. Maybe one has a pension and won’t need the money right away. One lifecycle fund isn’t going to be appropriate for both of them. Because of this, we suggest getting a personalized recommendation based off your specific situation, time until retirement, and investment objectives.

    Jeff
    Smart401k Adviser

  23. 23
    Michael Harr @ TodayForward Says:

    @Jeff

    I’d much prefer that someone use your service than target date funds. At what level (portfolio dollars) do you believe the cost of Smart401k pays off?

    Just curious.

  24. 24
    Phil Bryant, CEO Says:

    Target Date Funds were created because most people are ignorant and apathetic about their personal finances. As noted in the book “Nudge”, 90% of 401k participants accept the default investment selection and *never* touch it. The default selection used to be money market funds. Now the default is a TDF, which is a *much* better selection for the masses who take a do-nothing approach to investing. As such, TDFs are a huge benefit for America as a whole. They have had a positive impact, and will continue to do so over time. The 2010 Financial Engines annual 401k evaluation reports that “only” 68% of plan participants have asset allocations that are poor in terms of risk and diversification: http://bit.ly/hGk05f This is down from 69% 2 years ago. It’s only a percent, but every percent helps. The US has fallen from #1 in average wealth/adult to #7 (Credit-Suisse study). Getting the asset allocation right in our portfolios will help return us back to #1.

    Now, for those of you that are neither ignorant nor apathetic, as the author and commentators like Jeff above have correctly stated, you can do better than choosing a TDF for your investment by clearly aligning your asset allocation with your goals and risk tolerance.

    And to address Michael Harr’s question about Smart401k’s fees the answer is it depends, but not much. You can build a quick spreadsheet to easily estimate. If you are 30, have $20k, contribute $100/month, and the Smart401k service gets you an extra 0.5% of annual returns over the next 35 years, you will see that their service pays for itself handsomely.

  25. 25
    BG Says:

    Jeff) I can buy that. The later in life that you decide to start saving for retirement, there are two options: either save much, much more per month (compared to a younger person), or take on much more risk (compared to a younger person) — if they both have the same retirement goals.

    For example, if you haven’t save a cent for retirement, but plan to retire in 2015 — the conservative Vanguard Target Retirement 2015 fund probably isn’t gonna help you much…

  26. 26
    Eric Says:

    Article is too harsh on TRF (which are a good starting point and can prevent people from mucking up their portfolios a lot worse) but I agree that information is key.

  27. 27
    Jeff Says:

    I’d agree with Phil and Eric – TDF’s are a better default fund than the money market option. As you accumulate money in your account, it serves the individual to properly allocate the holdings based off your personal situation, time to retirement and risk level.

    In regards to Michael Harr’s question – we are often asked this question. We typically tell people even if you’re just starting out you can use our service one time to get on the right track. Then revisit the service maybe once a year to make sure you’re still heading in the right direction. When your account balance reaches between $5,000 to $10,000 we’d suggest signing up full time.

    With the power of compounding interest it’s never to early to be sure you’re properly allocated. Phil points out this fact in his post. Even the slightest increase in performance has a major impact long term.

    Jeff Studebaker
    Smart401k Adviser

  28. 28
    Bob Says:

    The article cites that lifecycle funds didn’t protect investors in 2008 but then complains about them increasing the amount of bonds near retirement. Seems like a contradiction.

  29. 29
    Ethan Says:

    @Bob: This is a poor article in several ways, but on that point both statements can actually be correct. The reason? Holding the wrong bonds. Holding lower-quality bonds, bonds with complicated maturity pictures, or bonds with high equity correlation isn’t much of a diversification. But high-quality bonds don’t have attractive yield on paper, and most investors don’t know enough to care.

  30. 30
    trevrep Says:

    target date funds are ok for a small piece of your tax-advantage account, ie 401k…that’s it…they are not a very sound investment. its simply asking someone who doesn’t know your specific situation to get you to a place they deem appropriate…like asking someone to get you to nyc, but not telling them exactly where, so when they drop you off, you may be upper east side, harlem, staten island…it’s an excuse for people not to hire a professional to help them properly manage they hard earned money…also these funds invest in bond funds…generally a very bad investment…fund of funds, excluding high-yield or muni, are not the best investments for most situations…

  31. 31
    Jonathan Says:

    “Each investor needs to do their homework and find a portfolio that works for them.”

    Wrong. I stopped being an investor in 2008. I am a trader with my account. I spend about 60% of the time in low risk government bonds. But I shift into high risk index funds occasionally to make money after steep corrections and then get out. The less time you are exposed to the equities, the smaller the chances you get caught in a crash. If you can avoid the crashes you are ahead of the game.I went to 100% government securities in September and Im actually making a little money during this correction as opposed to losing lots. Life cycle funds are good for 1 type of person, an idiot who knows nothing about trading the markets and doesn’t want to learn. I’m happy with my 15% return for 2012 so far. No other index fund or life cycle fund can match that.

  32. 32
    Toni Says:

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  33. 33
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  34. 34
    Maybelle Says:

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  35. 35
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  36. 36
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