Why Target-Date Funds Might Not Be Your Best Retirement Plan Option

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August 30, 2022

If you think saving for retirement is hard, you’re right. In the olden days, people who worked for a big company didn’t have to lift a finger, because they likely had a pension plan. Almost all large corporations gave their employees some life and health insurance and a pension, according to our 1977 cover story on fringe benefits. Nice!

But pensions were already inching towards the endangered species phase. Just a year later, Congress passed the Revenue Act of 1978, which included Section 401(k) — ring any bells? — that gives employees a tax break upfront on setting aside some of their income for retirement savings.

So pensions began their slow decline and employer-sponsored retirement plans started their ascent. As employees began to take more control of their money, confusion set in. After all, the road to retirement, which takes decades, isn’t simple. What to invest in? How aggressive should you be? What if you hate risk? Should you put it all into bonds, cash, money market funds?

Many companies chose cash alternatives or bonds, considered least likely to lose value, for their employees’ investments. But these were also least likely to get someone to a comfortable retirement.

1994: Enter target-date funds, designed with the do-it-for-me investor in mind. No more choosing funds, or stocks, or determining a percentage to place in fixed income. With a target-date fund, you contribute money to the fund that’s named with your desired retirement year and then sit back. As you close in on retirement, the fund automatically rebalances so you’re less invested in stocks and more invested in bonds.

In a bear market (remember a week ago Monday?) target-date funds are seriously underperforming, and sequence-of-return risks for those nearing retirement can be devastating. Over the past 28 years, the funds returned 750%, compared with 1,494% for the S&P 500 and 866% for a traditional 60/40 stock/bond allocation. Check out our story on target-date funds to learn more about this investment option and see if it’s really right for you.

— Jill Cornfield, deputy editor

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