The problem with a one-size-fits-all philosophy is that it never truly fits everyone. Thanks to many employers auto-enrolling employees in a 401(k), target-date funds have grown in popularity as a catch-all retirement plan, but the funds, including those sharing the same target date, can differ dramatically.
"Each target-date manager or firm has a different philosophy," says Jeff Holt, associate director of manager research for Morningstar Research Services in Chicago.
That philosophy manifests itself in the fund's glide path, which is how the mix of stocks and bonds becomes increasingly more conservative as the retirement or target date nears. "Picking a target-date fund is like giving driving directions to get to a beach," says Brannon Lambert, an advisor with Canvasback Wealth Management in Raleigh, North Carolina. "Someone in Oregon is going to have a different route than someone in Florida. Not everyone has the same destination."
Even though all target-date funds become more conservative with time, each fund has its own outlook for how and when to do that. That's why investors should evaluate the glide path of each target-date fund series, Holt says. All the funds in one series, such as Fidelity Freedom or T. Rowe Price Retirement, have similar glide paths, and the same fund family may have more than one series of target-date funds with different glide paths. For instance, the T. Rowe Price Target series has a different glide path than T. Rowe Price Retirement.
[See: 7 Tips for Finding the Best Target-Date Retirement Funds to Buy.]
Funds with target dates that are 40 years out may look similar, especially funds of the "big three" -- Vanguard, Fidelity or T. Rowe Price -- as all invest more than 70 percent of assets in stocks at that stage, says Holt, who authored Morningstar's 2017 Target-Date Fund Landscape report. The funds look the most different as the retirement date approaches, he says. "That's also the most important time because that's when an investor's assets are at or near their peak, and they become notably different depending on what target-date series you are in."
For example, one target-date fund may have 10 percent invested in stocks at retirement while another will have 60 percent, says Jeff Elvander, chief investment officer of NFP Retirement in Aliso Viejo, California. "There is no one silver bullet," Elvander says, even though the ultimate goal -- retirement -- remains the same.
Choose a glide path, not a target date.There are two types of glide paths: those that go "to" the target date, when the fund typically keeps the same asset mix throughout retirement, and those that go "through" the retirement date, with asset allocations that continue to change. Funds that glide through the target date account for something many investors overlook: the potential for a long retirement, which may require more aggressive asset allocations for longer periods, says Erika Jensen, president of Respire Wealth Management in Houston.
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