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Target Date Funds aren't all created equal

Not all investors will have the same needs as they approach retirement, and not all funds perform the same.

Target Date Funds for pre-retirees may be similar

Target Date Funds for pre-retirees may be similar but they're not equal. Photo Credit: Getty Images/iStockphoto

Remember Target Date Funds? They made a splash when introduced in the 1990s. According to a new survey from Mass Mutual Insurance Co., 29 percent of pre-retirees (those within 15 years of retirement) and 20 percent of retirees, currently or at the time they retired, were invested in TDFs.

These investments were popular because they were viewed as “set it and forget it.” Your initial asset allocation was primarily based on your retirement date and your age, and then it was adjusted based on your age. For example, you would have more stocks in your younger years and less later.

But, few things in the world of finance are easy-peasy. Here’s what to consider about TDFs.

•You know what they say about assuming

For starters, TDFs assume a great deal. “Just because someone is retiring in 5, 10, or 15 years doesn’t mean their risk profile, belief system, cash flow situation, disposable income or tax situation is the same. So why have the same allocations? Just because you are nearing retirement does not mean you should get more conservative,” says Joel Salomon, author of Mindful Money Management.

•Similar but not equal

Then too, there can be a wide variance in performance among TDFs, as the investment mandate can be significantly different, depending on the fund family and fund manager. Management expenses vary too, which impact performance.

For these reasons, Patrick Healey, president of Caliber Financial Partners in Jersey City, New Jersey, often recommends clients limit their TDF allocation to no more than 30 percent of their 401(k) plan.

Another caveat: Two 2035 Target Date Funds could have dramatically different glide paths — the way that they reduce equity exposure as one nears retirement. Some are more aggressive than others.

Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pennsylvania, “One size fits all doesn’t work with retirement funds.”

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