Target Retirement Funds Pros And Cons

One of my shortcomings here at Frugal Dad is that I do not provide much investing advice, and when I do, it is fairly generic and focuses more on providing broad strategies rather than specific recommendations. I intentionally avoid the subject of in-depth investment advice for two reasons.  One, I confess to not being that smart on all the various investment types, and there are others out there with stronger backgrounds on the subject.  And two, I like to keep things simple.

Target Retirement Funds

Following that theme of keeping things simple, I have been able to assemble a very modest portfolio of well-diversified mutual funds in my 401(k) account and a Roth IRA. For the Roth IRA, I decided to give target retirement funds a try. Target retirement funds are basically a collection of mutual funds offered by brokerages to provide the right allocation mix based on your anticipated retirement date.  If I was working with short time horizon of say five years, I would select something like a 2015 targeted retirement fund which would be comprised of mostly conservative investments.

Since I have a few years (decades) to go to reach retirement, I selected a 2040 target retirement mutual fund. Who knows, I might not be ready to retire in 32 years, but when I am five to ten years out I want to slowly move towards a more conservative allocation to avoid losing all I’ve worked to save the 25 years prior.  Ideally, I would like for this to happen automatically, without requiring me to log in and make transactions to move funds to conservative investments, rebalance my portfolio, and manually change allocation percentages for new investments.  Target funds are designed to handle all of those chores for you. However, they are not a totally “hands free” investment strategy.

Do your homework before investing in target retirement funds.  Some have fee ratios higher than that of individual funds. Targeted retirement funds have one other potential drawback: they may become more conservative than your risk tolerance is at the predetermined life stage you are in.  For instance, if I am nearing 60 years-old, but love my job, am in good overall health, and would like to work another ten years, I might like to extend a more aggressive mix of equities to maximize growth potential.  That is not possible with money locked away in a targeted retirement fund.

It is possible to invest in a well-diversified mix of low-cost mutual funds on your own, and manage them accordingly as you near retirement. However, it might make sense to make a targeted retirement fund part of that portfolio to further your diversification even more, and give you one less thing to micro-manage related to finances.


  1. Mr. Tough Money Love is absolutely right. TRF can be great, but they are all very different. On the balance, I find that most of them are too conservative and two expensive for me. But if you look around, you can find some good ones. The best TRFs that I am aware of are the funds inside the Federal Government’s TSP.

  2. Hey FD,

    Thanks for the article. Excellent as usual.

    I wonder how these TRFs were/are being impacted by the current financial crisis? I realize your 2040 fund should have enough time to correct any missteps but those with shorter time horizons may be in a bit of trouble.

    All the best

  3. One of the big problems with target retirement funds is that there is no consensus as to the allocations inside them. These allocations are all over the map depending on the fund company. Also, you need to carefully study the total fees involved. These are “funds of funds” and the costs you are paying collectively can be high. But the fund companies don’t always make that apparent.

  4. I think these are great for people who want to contribute to retirement without manually doing all the asset allocation changes that come with it. I opened a Roth for my wife and signed her up with one of these funds. Costs were low and she doesn’t need to worry about shifting her allocation around.

    I think as long as people understand what the fund is doing, how and when it does it, these are a fantastic way of building towards retirement.

  5. I just began the process of opening a TRF today, in an effort to create a repository where I can rollover future 401k’s. I’m pretty sure I’m going to change jobs with increasing frequency as I get older, so I figure that after each change I would need a place to put them. Thanks for the link!

  6. @A Dad’s Life: Well, like most people, my funds have taken quite a beating! Fortunately (I guess) the Roth IRA was still young so I have yet to invest much money before the market fell. My 401(k) was down around 35% last time I checked, but as you say, the time horizon is long, so I can afford to be patient.

  7. My TRF is down 36.58% over the past year, and down 16.88% over the past five years (target date 2035); the upside is that I just started contributing recently, the downside is that I chose to contribute a decent chunk of my paycheck and have lost -well, it’s a significant amount, for a frugal, coupon-clipping gal whose husband has been laid off. I’m looking at some of the money market and bond funds and thinking how nice it would be to be up 3% instead of down 36%. Question for anyone more knowledgeable than I (most anyone): Even if I dont get the pre-tax break, if I took the same amount of money, after taxes, and siphoned it into, say, an ING account… wouldn’t I be off in a high yield savings account after-tax than hemorrhaging money out of my pre-tax Simple IRA? Ugh.

  8. They basically have the same thing for the two 401K programs I’ve participated in. You may set a particular retirement date and the program will automatically move your investment funds from aggressive to moderate to conservative at predetermined time spans. Unlike the Roth TRF though, you may change your retirement date or even move the investment monies around in your 401K as you wish. Though they do say that once you pull out of the targeted date plan, you basically cannot jump back in again.

  9. I’ve been contributing to a TDF for a year now in my current 401k. I rolled over a previous 401k into it as well. Mine is priced fairly reasonable from what I can tell. The things is, this is only one of my retirement accounts. I have an IRA and a Roth IRA which don’t use TDFs.

    All that to say, I’m not terribly worried about the diversification or allocation of these funds, or the current results. It’s mostly US companies anyway. US companies will come around by the time I retire, if not a year from now. Heck, there will be a few more of these downturn I’m sure between now and retirement.

    You just have to ask yourself whether you believe in the American capitalist society. If you think people are going to get up tomorrow and go create products and services of value, then you’re bearish on the US economy in the long run. We’re the US, we kick ars and raise stock prices. Just ride it out.

    I feel sorry for the dude who was all up in stocks and is retiring next year.

    Sorry for the tangent.

  10. I think most investors are better served by a good asset allocation and rebalancing. Most target funds I reviewed mimic the S&P 500 index.