You’re probably familiar with target-date mutual funds.
They account for nearly one-third of all U.S. retirement savings and are held in 98% of defined-contribution plans, according to Vanguard.
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For those of you who aren’t familiar the funds, they are designed to be held at least until you retire. They generally start with a heavier weighting to stocks and a lighter weighting to bonds – to maximize your return over the years. Then the funds gradually shift to bonds from stocks to make your portfolio safer as you grow older.
In a recent commentary, Christine Benz, Morningstar's director of personal finance and retirement planning, assessed the target-fund asset class.
First she cited some common criticisms of target funds: “They’re one size fits none. They only feature the house brand of funds. They can be expensive.”
And what does Benz think?
“Whenever I see those critiques, my first response is to assess motive,” she said. “Oftentimes, target-date critics are selling some type of investment advice themselves. They may not admit it, but they view target-date funds as competition.”
Do You See What I See?
She also thinks of the doubters: “Are you seeing what I’m seeing?” Benz said. “Because from where I sit, target-date funds have been nothing short of the biggest positive development for investors since the index fund.”
That’s a pretty bold statement. Here’s how she backs it up
“The reasons are several,” Benz said. “Target-date funds take asset allocation and investment selection wholly out of investors’ hands—not just at a single point in time but at least until retirement.”
So, “they provide an element of inexpensive, quite reasonable investment advice for people who might not otherwise be able to afford it and might otherwise be making kooky choices,” Benz said.
“And most important of all, they have delivered positive outcomes for investors who own them. Target-date funds deserve broader adoption outside of company retirement plans.”
A 2023 Morningstar report looked at investor returns, which take into account the timing of investors’ purchases and sales. “Consistent with the finding in previous years, allocation funds, which bundle together stocks and bonds into a single fund and encompass target-date vehicles, fared the best of any major asset grouping,” Benz said.
