There is nearly $3 trillion invested in target date mutual funds mostly from 401ks, IRAs and other retirement oiptions. Whether retirement savers in target date funds know it or not, and we presume most don’t, they are mindlessly investing their wealth. The allocations between stocks and bonds in these funds are not based on risk or reward but solely on the calendar. Managing target date funds requires zero investment expertise, yet mutual fund and ETF managers rake in hundreds of millions of dollars a year in management fees.

Target Funds are passive mutual funds run by simple algorithms but with an advisor attached to it in its prospectus. Vanguard funds, the largest manager of target date funds, professes to offer close to free advice on its target date funds. The Vanguard 2050 fund holds under 10% of bonds and 90% of stocks. The Vanguard 2025 fund has approximately 45% of bonds and 55% of stocks. It is a blind formula that assumes that age defines the risk threshold of an investor.

The model works until both stocks and bonds underperform like last year or when the model misreads the risk threshold of an investor who wants to retire early or later in life.

Future Wealth’s View

There is simply no easy way to successful investing. What the target funds have done is confuse investors into believing that till the time they retire i.e. their target investment retirement date, these funds will invest wisely to provide good returns. What they are actually doing is saying to the investors – “Do not check the returns on your investments until your retirement date. Everything is going to be ok when you need the money at retirement.”

This model works mainly because investors rarely ever check their retirement portfolio or its returns. More importantly, they are led to believe that there are no management fees involved and rarely read the prospectus of the funds in their portfolios to see what is the expense ratio of each of the target date funds in their portfolios. If and when they do, you would expect investors to be up in arms asking the question – “ Why am I paying so much for an algorithmic driven investment with no human interaction when an actively managed advisor led investment portfolio is not much more than that?

Good luck getting an answer from Vanguard or American Funds or any of the other mutual funds that manage trillions in these target date mutual funds. It is like asking a barber if you need a haircut.