Go back to 1994: The year brought us the first Playstation, Netscape Navigator, and target date funds. Playstation is on its fourth generation; you haven’t used Netscape in a decade; and target date funds now make up over $517 billion of retirement assets.
Times change, and so do products and customer tastes. One product that has stayed remarkably the same is target date funds. How so? Target date funds still use just one data point — your desired age of retirement — to determine your investment plan. Despite this limited investment philosophy, target date funds continue to grow, especially as the press shines light on the country’s retirement crisis.
But even though target date funds are popular, what does it really mean to be invested in one?
For starters, it could mean a missed opportunity. Target date funds invest on a glidepath, which means they increase “safe” assets and decrease “risky” assets as you get closer to the target date, in most cases when you plan to retire. Regular investors tend to contribute more to retirement as they age, and also have the most wealth in the market close to retirement. As a result, many glidepath investors experience the high expected returns when their portfolios are small and the lowest expected returns when they have the most investable assets.
Target date funds can be great for some investors. As we wrote about in a previous post, they provided new retirement 401(k) participants who no longer had pensions to lean on an easier way to invest. A major problem, however, is that since they were introduced to the market, they have evolved very little. Retirement age is still the only way a target date glidepath is determined, and specific financial circumstances are not factored into their investing advice.
The fees charged by target date funds can range from low to very high. A popular Vanguard Target Retirement Fund (2045) charges 0.18 percent, or $18 per $10,000 invested. But T. Rowe — another of the largest target date fund providers on the market — charges an average of 0.79 percent, or $79 per $10,000 invested. According to the Wall Street Journal, some target date funds charge more than 1.00 percent.
Advice Should Be More Personal
Depending on how much you save for retirement, your investment needs could change. You may need to ramp up risky assets to increase your growth potential. Maybe you’ve reached your retirement goal and now you want to build wealth, and wealth is generally built faster through stock exposure. Perhaps you’ve realized you need more access to your cash. But if you’re stuck on the one-size-fits all glidepath in a target date fund, unfortunately your individual needs don’t matter. You can leave the fund — but you’ll pay trading costs and taxes to do so, plus even more trading costs to re-invest your savings.
What Betterment software does is take the positive “set it and forget it” stuff of target date funds, and then does better. Here’s how: Betterment monitors your investing progress to make sure you are on track to reach your retirement goal. When you’re not on target, Betterment provides actionable advice to get you back on the road to investment success. If you’re not contributing enough to your goal, Betterment will let you know. Target date funds do not consider how much you’ve saved or need to save. And no glidepath will make up the difference of a nest egg that just too small.
Betterment’s retirement portfolio goes beyond personalizing advice based on your progress. Our powerful software automates many other tasks for you, and that keeps your costs — and time managing your money — to a minimum. There are no trading costs for allocation changes. Betterment rebalances your portfolio automatically every time you make a deposit and our advice is always based on your current financial progress. And Betterment does all of this for a low fee, so you keep more of the investment returns you earn.
We clamor for the advancement of products all the time — electronics, search engines, medicine. Betterment is here to provide the same for your retirement.