Target Date Funds are mutual funds with mutual funds inside of them (yes, you read that correctly).  They’re sold in a way where the investor is supposed to pick a “Target Date” based on the approximate year in which they think they’ll retire.  When you invest your money into this fund, it becomes more and more conservative as you get older and close to the “target date” of your retirement.  Sounds good, doesn’t it?  Easy, too.

Think of it like vitamins, though.  Instead of buying a bunch of different vitamins that make sense for you based on quality and quantity, you buy one multi-vitamin, so as to “keep it simple.”  This multi-vitamin might have stuff in it you need, but not enough or too much of it.  It also likely has ingredients in it you don’t necessarily need.

The quality of the ingredients might be high, in-the-middle, or downright mediocre, but you’d have to do some research to understand what you’re actually ingesting.  However, the point of a multivitamin is to again, “keep it simple,” and like multivitamins, Target Date Mutual Funds might not be the simple solution you thought they were.

The marketing engines behind Target Date Funds are the mutual fund companies that design and sponsor them.  Just like multivitamins, food, or any other product, the companies that back them are going to do anything they can to make it as appetizing as possible.  After all, the way they make money is by getting you – the investor – to invest.

Like chasing the magical weight loss pill of the season, marketing departments of both nutritional supplements and mutual fund companies alike know that humans generally want to do as little work as possible.  Rather than preaching a tailored exercise regimen and a healthy diet based on the proper macro-nutrients, customized for you, based on your age, current health, diet, and weight (which is the only time tested way to get in shape), these companies know you’d rather just buy a pill, even if you know it probably won’t work, because it’s just “too easy.”

Your mind plays games and tries to trick you, saying “Okay, so the last couple pills, shakes, and videos I tried didn’t work, but maybe…just maybe this pill will do the trick!”  So you buy it – and get the same, disappointing result you did last time.

Target Date Mutual Funds aren’t all that different.  Like the multivitamin, crammed with “stuff,” every Target Date Mutual Fund is constructed with a couple good mutual funds, a few really bad ones, some funds that are brand new and need “seed” money to get ramped up, and everything in between.  You see, when you pick your own investments, you get to pick the size, quality, and type you want.  When you pick a Target Date fund, the mutual fund company gets discretion over where your money goes – and some of their funds aren’t so great, but they put your money in them anyway.  After all, you’ve given them full, legal discretion to do so!

The whole point of picking a “target date” is to ensure your portfolio is virtually automated, getting more and more conservative as you close in on retirement and beyond.  But what do the performance of these so-called “one-stop-funds” look like?

Let’s take a look at the American Funds 2010 Target Date Fund (AAATX) for instance.  American Funds has long been a reputable mutual fund company with a history going back to 1934 and a reputation for being low-cost.  If we rewind to 2007 and you had plans to retire in three years (in 2010), you might’ve purchased this mutual fund as a seemingly viable, inexpensive, professionally managed, conservative option.

However, between fall of 2007 and spring of 2009, your conservative portfolio would’ve crashed to the tune of more than -44%!  So much for “conservative.”

Looking at this mutual fund today – seven years after the “target date” in question – 43% of the portfolio is invested in U.S. and International stocks.  I pulled the allocation below directly from American Funds’ website:

I have no problem with a retiree owning stocks, by the way.  I just think it’s important investors understand that their target date fund may not be as safe as they were told when their financial adviser originally sold it to them.

Moving a step further, the next problem with Target Date Mutual Funds is the fact that “bonds” are perceived as “safe” investments.  Has anyone noticed that interest rates have been falling for more than 30 years?  Does anyone know what happens to the principal value of bonds when interest rates fall like this?  Well, I’ll tell you… when rates fall, bonds rise in value.  Conversely, when interest rates rise, bonds fall in value.  In which direction do you think interest rates will likely head over the course of the next 10-20 years? If that’s the case, in which direction do you think bond values will move?

One last question:  Armed with this knowledge and observing the allocation of the Target Date Mutual Fund listed above, do you really think having 51.9% of your money allocated in bonds is the best place to be invested?

Now, I’m not saying that bonds are bad investments, long-term, either!  What I am saying is that, over the next decade or two, it’s going to be crucially important to pick and choose your bond investments very carefully – and it would be wise to have your bond positions watched very closely.  In other words, the days of buying and holding onto bonds long term might not be the best strategy for you.

Another problem with Target Date Funds is their cost.  Mutual funds of all kinds have a hidden cost called an expense ratio.  This fee comes out of your returns before you get your statement in the mail.  Mutual funds of the target date variety can be expensive as well.  The cost is justified by saying that:

  1. There are costs to manage the target date fund, and
  2. Of course, there are all the costs related to the underlying mutual funds inside each portfolio.

The bottom line here is that, on the surface, target date mutual funds might seem like a super-easy “pill” that to swallow, washing away all the stress that comes along with detailed analysis and the otherwise necessary annoyance of ongoing monitoring of your investment portfolio.  In reality, they are more complicated that most investors realize.

We don’t recommend mutual funds at our firm because they’re expensive, and most aren’t allowed to get out of the market when it crashes.  Target Date Funds in particular create a false sense of safety, simplicity, and protection that I believe outweighs the benefits they’re sold on.

Instead, investors should take the time, do the work, build a portfolio that is customized to their financial anatomy, all resulting from the construction of a comprehensive financial plan, providing a blueprint that tells them how much risk they should take before, and throughout retirement.

Just like dieting, exercise, and supplements, retirement planning and investing takes work.  If you don’t want to do it yourself, find a qualified professional (not unlike a personal trainer) who can hold your hand and coach you through the gauntlet of frustrating financial minutia.

If you’re wondering where to find a qualified financial advisory firm, I recommend heading over to the National Association of Personal Financial Advisors’ website ( where you can type in your zip code and find a list of fee-only firms to interview.  Hiring a fee-only firm will get you 90% of your way toward finding a truly unbiased financial advisory firm that can provide you with authentic advice because they cannot charge commissions.

If you have any questions about the market, our portfolio management process, or your investments, please feel free to reach out.  Remember, even if you don’t currently work with us, you don’t have to be a client to ask a question!

If you’re interested in getting a 2nd opinion on your portfolio or financial plan, please call or email us so that we can confidentially discuss you – or your company’s situation further.

Warmest regards,


The opinions mentioned in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial adviser and strongly consider interviewing a fee-only financial advisory firm, prior to investing. Past performance is not guarantee of future results. Economic forecasts set forth may not develop as predicted. The views and opinions expressed in this commentary are those of Adam D. Koos, CFP® and do not necessarily represent the views of TD Ameritrade and its affiliates. Investing involves risk including loss of principal.