The problem with target date funds really hit home when I looked at how they performed with my children’s 529 plans. I had chosen these funds hoping they’d simplify investing, but they ended up costing my children over $40,000 in potential earnings because they couldn’t keep up with the S&P 500’s gains.
Target date funds adjust your investment mix as you approach a specific goal like retirement or college, getting more conservative over time. This glidepath strategy seemed smart, but when I put it into practice for my son’s education fund, it didn’t work out as well as expected. For example, from 2017 to 2021, while the S&P 500 surged about 70%, our son’s 529 plan barely touched $299,640, underperforming significantly because it was tied up in a conservative mix due to the target date fund’s structure.
Here’s where I went wrong: I was too conservative too soon. Back in 2017, influenced by market jitters and new parent caution, I opted for a fund that assumed my son would start college in 2033, which meant it had a heavier bond allocation. Even after a market dip in 2018, I stuck with the plan, thinking it was safer to keep contributions steady rather than shift to more aggressive investments like the S&P 500 — a decision I regretted as the market soared in the following years.
To top off the frustration, target date funds are stubbornly rigid. They don’t adapt based on market conditions but stick to a predetermined path, making them less responsive than I’d like. This inflexibility was a stark contrast to my active management of other investments, which allowed for adjustments based on performance and economic conditions.
And then there’s the cost. The expense ratio on my son’s fund was 0.87%, significantly higher than the 0.09% I could have been paying with a basic S&P 500 ETF. Over the years, these fees really add up, eating into potential gains.
Reflecting on this, I’ve learned that if you’re going to use a target date fund, choose one that’s passively managed to keep costs low. And be wary of starting too conservative, especially if you have a long time horizon. You might be better off managing your own mix of ETFs, adjusting as you go, to mimic the strategic adjustments of a target date fund but at a lower cost and with more control.
For those considering target date funds, they’re not all bad. They offer a hands-off investment approach that can be appealing if you’re not interested in micromanaging your portfolio. But for something as critical as funding education through a 529 plan, it might be worth taking a more active role, at least in the early years when growth is critical.
In short, target date funds can simplify investing, but they come with trade-offs in flexibility, performance, and cost. If you do go this route, picking a low-cost, index-based option might give you the best of both worlds: easier management without the hefty fees.
