First, let me give this disclaimer: Target Date Funds are a great solution if the alternative is leaving your retirement money in a Money Market Fund. That said, there are three problems with almost all Target Date Funds inside of employer sponsored retirement accounts (like 401k and 403b plans).
What is a Target Date Fund?
Target Date Funds were meant to it simple to invest for a specific date in the future – like the year you retire. In theory, an investor can select the Target Date Fund with the year closest to when they are planning/hoping to retire. For example, a 35 year old planning to retire at age 60 might select a 2040 Target Date Fund. This single fund election is comprised of a few individual Mutual Funds to give instant diversification across asset categories: Large Company Stocks, Small Company Stocks, International Stocks, Bonds, Money Market, etc. Target Date Funds automatically adjust the risk profile of the fund (the weighting of stocks vs. bonds) inside the portfolio as the years progress. So, a 2040 Target Date Fund may have 80-90% of the portfolio in stocks, but by 2039 it will likely have adjusted the ratio closer to 50% stocks and 50% bonds/money market. This happens automatically for the investor, without them doing anything on their own. In theory, it seems fairly intuitive and a decent strategy for retirement saving. Now let’s discuss the shortcomings.