Why Target-Date Funds Fail: A $3 Trillion Delusion

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Morningstar estimates that as of 2022, there was nearly $3 trillion invested in target-date mutual funds (TDFs). Per Morningstar: Target-date strategies remain the investment vehicle of choice for retirement savers.

Whether retirement savers in TDFs know it or not, and I 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 TDFs requires zero expertise, yet mutual fund and ETF managers rake in hundreds of millions of dollars a year in fees.

The volatile market environment helps us appreciate why TDFs are foolish.

What are TDFs?

  • Barron’s estimates that approximately 42% of all retirement plan dollars are in TDFs.
  • Per Investopedia, more than 75% of investors have some money in TDFs.
  • The Department of Labor claims that 70% of employers use TDFs as their default investment.

TDFs are passive mutual funds run by simple algorithms. To be frank, the word algorithm makes their investment process seem more sophisticated than it is.