Do Target Date Retirement Funds Have a Down Side?

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JSparks
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Do Target Date Retirement Funds Have a Down Side?

Post by JSparks » Tue Jul 02, 2019 3:51 pm

Perhaps this question is too broad (or stupid) but I'll ask any how. Do target date retirement funds have a down side?

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MNGopher
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by MNGopher » Tue Jul 02, 2019 3:55 pm

Slightly higher expense ratio than if the underlying funds were purchased separately. But this difference will not be all that significant to newer investors, and is quite likely worth it.

CoastalWinds
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by CoastalWinds » Tue Jul 02, 2019 3:58 pm

Embedded bonds are not ideal for holding in a taxable account. Splitting it into its underlying funds allows for preferred asset locations.

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Sandtrap
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Sandtrap » Tue Jul 02, 2019 4:02 pm

JSparks wrote:
Tue Jul 02, 2019 3:51 pm
Perhaps this question is too broad (or stupid) but I'll ask any how. Do target date retirement funds have a down side?
Not "downsides" per se, but different characteristics.
It depends on what "you" need.

1. Glide slope allocation. It changes to meet the target date. You may want it static or be able to change it as you wish.
(The Target Date is often but does not have to be the year of retirement).
2. Higher expense ratio than the underlying funds.
IE: "Fund of Funds". IE: Total Stock, Total International, Total Bond, Total International Bond.
3. As an aside, "Life Strategy" funds will have changing percentages of the underlying funds as decided by others, not you.
4. Self Rebalancing. You may want to change your allocation when you rebalance. So, a target date fund may not be for you.

For comparison, research Target Date Funds and compare with "Life Strategy Funds" and also "Balanced Funds" on Vanguard.

These types of funds also work better for you depending on where you are putting them, in tax-advantaged space IE: 401k, IRA, etc, or non-tax advantaged space.

And, lots more.
Search the forum archives for threads on "Target Date Funds".
Also, read the WIKI on "Target Date Funds", etc. (link below)
j :happy
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Stinky
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Stinky » Tue Jul 02, 2019 4:03 pm

One-size-fits-all allocation between bonds and equity. Your tolerance for equity market risk may be greater or smaller than the target date glide path.
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Quirkz
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Quirkz » Tue Jul 02, 2019 4:17 pm

Stinky wrote:
Tue Jul 02, 2019 4:03 pm
One-size-fits-all allocation between bonds and equity. Your tolerance for equity market risk may be greater or smaller than the target date glide path.
You may be able to partially address this by picking a target date earlier or later to be either more aggressive or conservative, even splitting the difference between a couple of funds, but there's still parts of it--like the glide path itself--you definitely can't control.

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Re: Do Target Date Retirement Funds Have a Down Side?

Post by tennisplyr » Tue Jul 02, 2019 4:18 pm

When making withdrawals you cannot specify where you want take it from...stocks vs. bonds.
Those who move forward with a happy spirit will find that things always work out.

3-20Characters
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by 3-20Characters » Tue Jul 02, 2019 4:29 pm

Here’s my take.

The biggest drawback is that you can’t maximize tax efficiency by choosing which funds go in which accounts.

The extra cost of ER doesn’t seem like a good reason not to use a target date fund if you like everything else about it.

AA: Instead of picking your retirement year, pick the AA you want to start at. Accept the the glide path of the fund. It’s a feature. If you don’t want any glide path, use LS or 3 fund instead.

A TD fund is ideal for simplicity and to help guard against behavioral errors. A great hands off approach. If you want more control of your portfolio, it’s not intended for you. It doesn’t mean that there’s anything wrong with it.

Disclaimer: I’m a 3 funder plus tilt.

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Watty
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Watty » Tue Jul 02, 2019 4:36 pm

CoastalWinds wrote:
Tue Jul 02, 2019 3:58 pm
Embedded bonds are not ideal for holding in a taxable account. Splitting it into its underlying funds allows for preferred asset locations.
+1

One other potential drawback is that many 401k plans have target date funds that have an expense ratio that is too high.

The target date funds in my 401k plan had expense ratios that were too high so I used a three fund portfolio until I retired.

Once I retired I moved most of my funds into a low cost target date fund since I did not have a lot of funds in taxable accounts where taxes were an issue.

The target date fund will easier to manage as I get older and may be less financially capable. It will also be easier for my less financially knowledgeable wife has to manage it some day.

dbr
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by dbr » Tue Jul 02, 2019 5:20 pm

The way TD funds are labelled can cause people to adopt an inappropriate asset allocation by referencing the date instead of the actual asset allocation and glide path.

TD funds should not be held in taxable accounts partly due to tax efficiency but also because as time goes on enough taxable unrealized gain may accumulate that it is hard to get out of the fund. A total stock market fund is one that is less likely to be one a person might liquidate in a taxable account to buy something else. This is especially a concern as the fund shifts to mostly bonds.

capjak
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by capjak » Tue Jul 02, 2019 5:42 pm

They are awesome in a tax deferred account, auto rebalance etc... Mine options have reduced fees since institutional shares.

In taxable you may want to pick your own, but really a small fee the target date/balanced funds are a great option also.

Mike Scott
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Mike Scott » Tue Jul 02, 2019 6:25 pm

They may include funds that you don't really want to have.

Thesaints
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Thesaints » Tue Jul 02, 2019 6:32 pm

The major downside is that they are optimized for an average, stereotypical, future retiree and there are good chances you ain't one.

Trader Joe
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Trader Joe » Tue Jul 02, 2019 6:34 pm

JSparks wrote:
Tue Jul 02, 2019 3:51 pm
Perhaps this question is too broad (or stupid) but I'll ask any how. Do target date retirement funds have a down side?
Yes, here are the downsides associated with the Vanguard Target Date Funds:

1. High expense ratio.
2. The inclusion of International Equities.
3. The inclusion of International Bonds.

Best of luck.

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SevenBridgesRoad
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by SevenBridgesRoad » Tue Jul 02, 2019 8:16 pm

Trader Joe wrote:
Tue Jul 02, 2019 6:34 pm

Yes, here are the downsides associated with the Vanguard Target Date Funds:

1. High expense ratio.
2. The inclusion of International Equities.
3. The inclusion of International Bonds.

Best of luck.
Yikes. Let's not confuse OP by mixing facts and your opinions.
1) Fact: yes the ER is higher than buying the individual funds. Opinion: for me and others its worth it. A small amount of money for buying simplicity and avoiding all sorts of behavioral mishaps. True set it forget it.
2) Your opinion that this is a downside. Others think IE is the way to go, even smart people.
3) Your opinion that this is a downside. Others think IB is the way to go, even smart people.
Retired 2018 age 61/Variable Percentage Withdrawal method/One fund: VTINX all accounts/No mortgage,debt/Good enough | "Not using an alarm is one of the great glories of my life." Robert Greene

nix4me
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by nix4me » Tue Jul 02, 2019 8:27 pm

Trader Joe wrote:
Tue Jul 02, 2019 6:34 pm
JSparks wrote:
Tue Jul 02, 2019 3:51 pm
Perhaps this question is too broad (or stupid) but I'll ask any how. Do target date retirement funds have a down side?
Yes, here are the downsides associated with the Vanguard Target Date Funds:

1. High expense ratio.
2. The inclusion of International Equities.
3. The inclusion of International Bonds.

Best of luck.
4. US Bonds.

UpperNwGuy
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by UpperNwGuy » Tue Jul 02, 2019 9:04 pm

Trader Joe wrote:
Tue Jul 02, 2019 6:34 pm
JSparks wrote:
Tue Jul 02, 2019 3:51 pm
Perhaps this question is too broad (or stupid) but I'll ask any how. Do target date retirement funds have a down side?
Yes, here are the downsides associated with the Vanguard Target Date Funds:

1. High expense ratio.
2. The inclusion of International Equities.
3. The inclusion of International Bonds.

Best of luck.
Item #3 is true for Vanguard’s target date funds, but not true for Fidelity.

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unclescrooge
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by unclescrooge » Wed Jul 03, 2019 12:52 am

Thesaints wrote:
Tue Jul 02, 2019 6:32 pm
The major downside is that they are optimized for an average, stereotypical, future retiree and there are good chances you ain't one.
+1

And if you don't know where you are going, they will take you 80% of the way there.

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Re: Do Target Date Retirement Funds Have a Down Side?

Post by H-Town » Wed Jul 03, 2019 1:46 am

JSparks wrote:
Tue Jul 02, 2019 3:51 pm
Perhaps this question is too broad (or stupid) but I'll ask any how. Do target date retirement funds have a down side?
1) It's not tax efficient for brokerage account.
2) It's difficult to maintain your preferred AA across multiple asset locations unless you use target date everywhere. Go back to 1) if you use target date fund for brokerage account.
3) High fee (except for Vanguard).

Target date fund is perfectly suitable for most people who don't aim to maximize return after tax. Granted, not all people try to maximize tax can achieve this feat. An autopilot target date fund will keep most investors from harming their own portfolio.

stocknoob4111
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by stocknoob4111 » Wed Jul 03, 2019 2:25 am

they have poor performance... FFFFX 2040 TD has 2001-19 CAGR of 4.98%... an 90/10 S&P500/Total Bond returned 6.5% in that same period.

If an active fund can't beat a simple 2 fund then what is the point? If you look at FFFFX it has all sorts of esoteric junk in there so I figured the "experts" know what they are doing.. apparently not if you look strictly at performance and in the end that is the only thing that matters.

zrail
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by zrail » Wed Jul 03, 2019 4:50 am

stocknoob4111 wrote:
Wed Jul 03, 2019 2:25 am
they have poor performance... FFFFX 2040 TD has 2001-19 CAGR of 4.98%... an 90/10 S&P500/Total Bond returned 6.5% in that same period.

If an active fund can't beat a simple 2 fund then what is the point? If you look at FFFFX it has all sorts of esoteric junk in there so I figured the "experts" know what they are doing.. apparently not if you look strictly at performance and in the end that is the only thing that matters.
FFFFX is an actively managed target date fund and thus has all the same caveats as other actively managed funds. A better comparison may be FBIFX, Fidelity’s 2040 index fund.

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Re: Do Target Date Retirement Funds Have a Down Side?

Post by averagedude » Wed Jul 03, 2019 5:05 am

If you are someone who knows very little about investing, find the topic extremely boring, and have no desire to put in time to learn this topic, then target dated funds are an EXCELLENT choice and you will likely have better returns than the majority of investors over the long term. In my opinion, you will probably do better than most investors who are educated on the subject of investing because you will be more diversified, won't be stock picking or market timing, and won't be making emotional decisions that can ruin a good laid out plan. Just be sure to pick a low cost provider of these products.

Dandy
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Dandy » Wed Jul 03, 2019 5:18 am

Any balanced or all in one fund or one with a glide path usually require compromise. e.g. Maybe you don't want international bonds or not that allocation to them, the overall equity allocation may be too aggressive or not aggressive enough for you. These funds are often a rough fit for what you may really want. But, if they are close to what you want or you aren't really sure but want a diversified portfolio - they can be a great solution. They take a lot of managing your investments to automatic pilot--usually for a reasonable cost. Much better in many cases than using a costly financial adviser.

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Re: Do Target Date Retirement Funds Have a Down Side?

Post by burt » Wed Jul 03, 2019 6:00 am

averagedude wrote:
Wed Jul 03, 2019 5:05 am
If you are someone who knows very little about investing, find the topic extremely boring, and have no desire to put in time to learn this topic, then target dated funds are an EXCELLENT choice and you will likely have better returns than the majority of investors over the long term. In my opinion, you will probably do better than most investors who are educated on the subject of investing because you will be more diversified, won't be stock picking or market timing, and won't be making emotional decisions that can ruin a good laid out plan. Just be sure to pick a low cost provider of these products.
+1
Also, if TD funds help people to avoid high fee "advisors".... another big positive for TD funds.

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Re: Do Target Date Retirement Funds Have a Down Side?

Post by CWRadio » Thu Jul 04, 2019 5:21 am

tennisplyr wrote:
Tue Jul 02, 2019 4:18 pm
When making withdrawals you cannot specify where you want take it from...stocks vs. bonds.
Is there a fund that when you make a withdrawal it sell the the underlying shares that are doing better? Example if equities are down it sells from the bond side.

zrail
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by zrail » Thu Jul 04, 2019 6:43 am

CWRadio wrote:
Thu Jul 04, 2019 5:21 am
tennisplyr wrote:
Tue Jul 02, 2019 4:18 pm
When making withdrawals you cannot specify where you want take it from...stocks vs. bonds.
Is there a fund that when you make a withdrawal it sell the the underlying shares that are doing better? Example if equities are down it sells from the bond side.
I think that it’s rare that a large and growing fund actually sells anything outside of extraordinary circumstances. They'll typically satisfy redemptions out of short term cash received as contributions.

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Re: Do Target Date Retirement Funds Have a Down Side?

Post by z3r0c00l » Thu Jul 04, 2019 6:55 am

My main concern is that companies can't help but tinker with these funds. Vanguard is no exception, they keep changing the composition of their funds, most notably adding international bonds. Now that may be a good idea, but I don't really want my fund to change through the years based on the whims of the managers. That is like active management light.

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Re: Do Target Date Retirement Funds Have a Down Side?

Post by rkhusky » Thu Jul 04, 2019 6:57 am

tennisplyr wrote:
Tue Jul 02, 2019 4:18 pm
When making withdrawals you cannot specify where you want take it from...stocks vs. bonds.
If the TD fund has the AA that you want, then there is no reason to want to withdraw from stocks vs bonds, unless you are changing your AA.

zrail
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Re: Do Target Date Retirement Funds Have a Down Side?

Post by zrail » Thu Jul 04, 2019 7:08 am

z3r0c00l wrote:
Thu Jul 04, 2019 6:55 am
My main concern is that companies can't help but tinker with these funds. Vanguard is no exception, they keep changing the composition of their funds, most notably adding international bonds. Now that may be a good idea, but I don't really want my fund to change through the years based on the whims of the managers. That is like active management light.
This is why I like FFNOX Fidelity Four-In-One Index. It has a stable allocation that hasn’t changed since inception: 60% US equities, 25% developed international equities, 15% US total bond market. It’s also incredibly cheap at 0.08% net ER.

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Re: Do Target Date Retirement Funds Have a Down Side?

Post by Thesaints » Thu Jul 04, 2019 2:01 pm

z3r0c00l wrote:
Thu Jul 04, 2019 6:55 am
but I don't really want my fund to change through the years based on the whims of the managers. That is like active management light.
Indexes do change at the "whims" of their providers and not even that rarely. Just sayin...

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