Capstone August 13 2025
By Bryce Pease CFP® Accredited Investment Fiduciary® Casey Morris CFP® Capstone Pacific Investment Strategies, Inc. California, Colorado, Nebraska
A target-date fund (TDF) is a long-term investment account that is adjusted over time to reduce risk as the investor approaches a specific goal such as retirement. Sometimes a TDF is called a lifecycle fund. No matter what it’s called it is usually a balanced mutual fund, especially inside a retirement plan like a 401(k) or 403(b). The fund will hold both stocks and bonds. It is also a “fund of funds,” meaning its only holdings are usually other mutual funds. The fund is automatically rebalanced or reallocated to maintain its desired mix of stock and bonds as time goes by. A higher percentage of 401(k) participants in their twenties tend to hold target date funds as compared to participants in their sixties.
So, how do they work? Let’s say you plan to retire in 2060 and buy a Target Date 2060 fund, which is presently invested in more stock funds than bond funds. The thinking is you have decades until retirement and can afford to take on more risk. While stocks might see near-term losses, a Target Date 2060 fund has lots of time to recover and grow substantially over the long term. The mutual fund (or exchange-traded fund) that gradually rebalances and reallocates assets as you get closer to retirement, typically shifting the majority of assets from riskier investments, such as stocks, to more conservative investments, such as bonds and cash. The fund is designed as a one-stop investment shop with a diversified set of asset classes. Some funds even advertise that ‘you can set it and forget it’ which can be a very bad idea for most investors.
Fees inside TDFs can be more expensive. Many funds add on an additional fee above and beyond the expense ratios of the underlying accounts. Their asset-weighted average expense ratio was 0.36 percent at the end of 2023, according to Morningstar. That means an investor would pay $36 annually for every $10,000 invested. That’s down from 0.87 percent in 2004, or $87 annually. Inside a retirement plan participants have no choice but to use the funds provided by the employer.
A quick note on Morningstar which many people use to make investment decisions. They rate funds from a 1 star, low, to a 5 star, high, but the ratings are based on past performance. To us, using a 5 star rating as a guide to buying a fund is more like trying to drive your car up a narrow and winding mountain road using only your rear view mirror!
Our concerns about TDFs is more of a one size misfits all. For example some of our clients cannot tolerate having a lot of money in stocks and others may not want much in bonds no matter what their age.
Casey and Bryce
at 626-915-7006
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s portfolio. Any securities mentioned in this article are not a recommendation to buy, sell or hold.
