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Target Date Mutual Funds Comments

  • By MP Dunleavey
  • January 13, 2010

walking along dirt path

A recent study found that most investors who have target date mutual funds don't understand how they work.

What makes this discovery sort of funny—but not in a good way—is that the point of target date funds (TDFs) is that they were supposed to make the retirement saving process a no-brainer:

Like putting meat and onions in a slow cooker, allowing you to come home to a fully cooked meal.

Here's the idea: You park your money in a TDF, timed to the year you want to retire—say, 2040—set it and forget it. Target date funds have all the ingredients pre-assembled: stocks, bonds, cash, etc. You come back at 65 and, voila!—a fully cooked retirement nest egg.

At least in theory.

According to a study, published by the Employee Benefits Research Institute in November, many people have failed to grasp the one-stop-shopping logic of TDFs. They stuff other funds into their accounts, and end up "with a potentially inferior portfolio."

Given that about 58% of 401k plans at mid-size to large companies rely on TDFs as the default investment choice (i.e. the one you get if you don't pick specific funds)—this is problematic.

We're not endorsing TDFs, which can be flawed and cost more than other mutual funds. But understanding how this popular type of investment works is essential, especially if you own a target-date fund. Do you? It's something to check, as you put your financial house in order.

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