For many people, yes. A low-cost target date fund is a sound way to invest for retirement with a single decision, and I say that as someone who is paid to manage money. If your finances are simple, it may be all the investment management you need.
The year in the name is not the whole story, though. Here is what the fund does and what to check.
What it does
You pick the fund with the year closest to when you plan to retire. The fund holds a mix of stocks and bonds and shifts that mix for you over time: more stocks when you are young, more bonds as the year approaches.
The SEC’s bulletin on target date funds calls that shifting schedule the glide path.
The real value is that it does the things most people do not do on their own. It rebalances. It gets more careful as you age. And it gives you one number to look at, which makes it easier to leave alone in a bad year.
Check 1: What is actually inside
The SEC warns that funds with the same target date often have very different investments and very different results.
One 2040 fund might hold much more in stocks than another 2040 fund. Neither is wrong. They are simply different levels of risk under the same label.
Look up your fund’s current mix of stocks and bonds. It is on the fund’s fact sheet. Then ask whether a drop in the stock portion is something you could sit through.
Check 2: “To” or “through”
There are two kinds of glide path.
A “to” fund reaches its most careful mix at the target date and generally stays there.
A “through” fund keeps shifting for years after the date, which means it holds more in stocks on the day you retire.
The SEC notes that a “to” fund typically turns conservative earlier. A “through” fund carries more risk at retirement, and more room to grow in the decades after. You should know which one you own before the year arrives.
Check 3: The cost
Funds with the same date can charge different fees. And because a target date fund often invests in other funds, there can be two layers of cost.
Find the expense ratio. If your 401(k) offers a low-cost version built from index funds, that is usually the one to compare against.
The year on the label is the same. The risk inside may not be.
What a target date fund cannot do
It knows your age and nothing else. It does not know about your pension, your spouse’s savings, your house or your health.
It guarantees nothing. The SEC is plain that these funds do not guarantee enough income in retirement, or any particular amount.
It works best alone. If you hold a target date fund plus five other funds, the mix it worked out for you is no longer the mix you have.
It does not plan withdrawals. Which account to draw from, when to claim Social Security, how to manage taxes in retirement. Those are outside its job.
So do you need more than this?
If you are still working, have one or two accounts and nothing complicated, a good target date fund plus steady saving covers the investing part. You may not need an advisor for that, and I would tell you so.
Where people usually need more is near retirement, when the questions turn from “how do I invest” to “how do I turn this into income without running out.”
Related questions: what a good expense ratio is, advisor or do it yourself, is my 401(k) safe in a crash and why 401(k) fees run high.
One question for this week: is your target date fund a “to” fund or a “through” fund? The fund company’s website will say.
As always, if you want to talk any of this through, the door is open. Genti