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How to Avoid the Restrictions of a Target Date Fund

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Your Survival Guy’s never been a big fan of target date funds, where you rely on fund managers to adjust your allocation like a robot based on when you plan to retire. But, unfortunately, these target date funds litter many of America’s 401(k)s (and other defined contribution plans). Many investors just can’t get away from them. Want another option? “Sorry,” they say.

Plans that depend on target date funds are like going to Kentucky Fried Chicken and asking for filet mignon. It’s not going to happen. Sure, you can manipulate the allocation by being clever with the target dates. Your Survival Guy, for example, would choose a retirement date 10-years earlier than my planned retirement to secure a more “conservative” portfolio. But that’s not what most plan participants do, and they’re paying the price for it in this market.

From The WSJ:

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But many of these funds are shifting into bonds more slowly than they did a decade ago after managers loaded up on stocks.

Portfolios for the youngest workers now invest 92% of contributions in stocks, up from 85% a decade ago, with some top-selling target-date funds nearing 100% in stocks at the outset of an investor’s working life, according to Morningstar Inc.

Midcareer workers had the biggest rise in stock-market exposure, with portfolios for 45-year-olds now holding 82% in stocks, up from 69% a decade ago—and far more aggressive than the traditional 60/40 portfolio. At retirement age, the median exposure is now 46%, up from 43% in 2011. These figures are based on the median exposure at various ages among the dozens of target-date funds Morningstar follows.

For more than a decade, the strategy was a boon for investors. Stocks surged and so did retirement balances. But now, with the S&P 500 on Friday closing about 19% below its peak, the strategy is facing a test.

Action Line: Most 401(k)s offer a self-directed option where you can take a non-taxable, in-service distribution (basically a tax-free transfer to a rollover IRA), giving you the option to work with an outside advisor. You know who to call.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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