Why Target-Date Funds Miss the Boat
These vehicles fail to meet the challenge of creating a relatively stable, sustainable, and inflation-adjusted income stream throughout retirement, says contributor Scott Simon.
In last month's column, I revisited the discussion in my January 2016 column about target-date retirement income funds first made available by Dimensional Fund Advisors in late 2015. This month, I'm taking a look at target-date funds and will explain why they are suboptimal to target date retirement income funds.
A target-date fund is a "fund of funds" structure. It provides participants in defined contribution plans such as 401(k) plans with a "do it for you" investment solution by which they invest in a portfolio of stocks, bonds, and other investments. As a participant gets older and older, the manager of the target-date fund changes the target-date fund's asset allocation--called a "glide path"--by reducing more and more the portion of the target-date fund portfolio invested in riskier investments such as stocks and increases the portion in less risky investments such as bonds.