What Is A Target Date Mutual Fund And Should I Use It?

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Hank – I have a few “target date” mutual funds in my 401k plan from Fidelity. They are:
Fidelity Freedom 2010 FFFCX
Fidelity Freedom 2015 FFVFX
Fidelity Freedom 2020 FFFDX
Fidelity Freedom 2025 FFTWX
Fidelity Freedom 2030 FFFEX
Fidelity Freedom 2035 FFTHX
Fidelity Freedom 2040 FFFFX
What exactly are they, and should I use them? Thanks! – Penelope from Maine

Hey Penelope, thanks for the question, I can help answer that one. Target date funds, or lifecycle funds as their sometimes called are there for the very novice investor. They are a fit for some, but for someone willing to put time in, might not be the best choice –

The point of these funds is to automatically adjust the asset allocation as you approach retirement. For example, the Fidelity Freedom 2030 fund features 80% stocks, 15% bonds, and 5% cash, while the Fidelity Freedom 2010 fund features around 50% stocks, 35% bonds, and 15% cash (which is what will happen to Fidelity Freedom 2030 around 2028).

But the problems with it? Well if Investor “A” is a single, high risk tolerance, millionaire and set to retire in 2020 and Investor “B” is a single father raising 4 kids set to retire in 2020 that needs to be conservative, do you think they have the same tolerance or goals by then? Not likely that they’ll have similar portfolio needs.

Another problem with these funds is that they’re pretty much all LargeCap U.S. based funds. Most invest very little overseas or in the Small and MidCap funds, reducing your exposure.

Or how about if you want to retire in 2043? Not 2040 or 2045, what fund do you choose? Kind of a coin flip and you don’t want your assets being finicky when it is time to hit retirement. Another thing to watch out for is that the funds are generally based on that particular companies OTHER funds. There are 10,000-ish funds out there, but most target date funds stick to their own mutual funds, instead of using index funds.

So Penelope, basically if you’re looking for a “set it and forget it” type of fund that you don’t have to worry about, they’re not bad. You’re at least in the market and they’ll likely turn a profit. However, if you’re willing to spend some time on your retirement, I’d try to find better funds in your 401k.

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