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Target Date Fund Vs. Custom Planning: What are They and Which is Better for You?

Target Date Fund Vs. Custom Planning: What are They and Which is Better for You?

financial advisor San Antonio Sep 27th, 2021 by: Darryl Lyons

When it comes to retirement planning, there are a lot of choices (and options within choices) to consider. This can make the process overwhelming, and is one of the reasons people often turn to automated investing platforms like target date funds. However, while choosing an automated fund based on your retirement date may make getting started a bit simpler, target date funds fall short for many people for many reasons. 

To make matters worse, a recent study reported that one-third of investors who use target date funds, aren’t even using them correctly. 

At PAX Financial Group, we take a different approach. As financial advisors in San Antonio, Texas, we help clients address important decisions with holistic, hands-on, customized, full service financial services, because we know that no two retirements are exactly the same. 

Here’s how these approaches differ:

What is a Target Date Fund?

A target date fund is a class of mutual funds or Exchange Traded Funds (ETFs) that is designed around a specific date. In most cases, the target is a retirement date. 

Target date funds are structured to optimize risk in accordance with time, so target date funds are automatically and periodically adjusted, and gradually shift from an aggressive investment profile to a more conservative one as the target date gets closer. 

This may sound like a wise strategy; however, target date funds tend to offer a very basic, passive approach to investing. There isn’t much personalization with target date funds, and they don’t offer much flexibility. 

What is Custom Planning?

With custom, holistic financial planning and wealth management, you are working toward a specific goal. Your plan is personalized to you and can be revised as life happens. 

Everyone’s circumstances are different. Not all investors have the same needs or risk tolerance at the same ages. Therefore, not everyone benefits from the one-size-fits-all target date fund strategy. 

Custom planning involves working closely with a financial advisor to tailor a personalized plan. During this process, at PAX Financial Group, your financial advisor will consider all aspects of your financial and personal life to create a one-of-a-kind investment plan that takes into account your specific needs, both now and in the future.

 

Retirement planning can be complicated. Contact the team at PAX Financial Group to see how we can help.

 

How Target Date Funds Can Fall Short 

Target date funds offer few customization options. By design, target date funds are meant to be easy and automatic. For the average investor, this may be enough. For investors who have more complex needs, such as business owners and high net worth individuals, you likely want the option to look deeper, have more customization, and make changes.

Target dates funds also neglect to consider life in retirement. Because they are intended to be cashed in at a designated point, target date funds are not meant to manage or continue building your wealth in retirement. Yet, for many people, retirement can stretch 20, 30, even 40 years in some cases. That’s a lot of time to leave out of a financial plan. Talk with a financial advisor about life in retirement and how to continue your investing journey in your Golden Years.

While there are different target date funds to choose from, each one is created with the average investor in mind in order to be applicable and appealing to the masses. If you’re not the average investor, talk to your financial advisor about creating a custom plan based on your specific goals. 

Another major downside to using target date funds is they don’t come with support, which means you might not have anyone to talk to, ask questions of or lean on in times of panic. If you have questions or concerns, it might not be as simple as you had hoped to get them addressed. Having a direct line of communication to get your questions or concerns answered is one of the main benefits of working with a real person. At PAX Financial Group, we welcome questions and stay in regular contact with our clients.

Common Misconceptions About Target Date Funds

While target date funds may eliminate some of your investment decisions, you’ll still need to do your research, because not all target date funds are the same. They might have the same year in the title, but that may be the only thing about two funds that’s equal. They may have different holdings, allocations and investment styles.

Target date funds also don’t take into consideration other retirement plans. The idea behind a target date fund is that all of your investments are in one fund, so if you’re invested in more than one, you may be unnecessarily exposing yourself to more risk.

Target date funds can also be more expensive than you may think. Because they are actually a fund of funds, you pay fees at both levels, and the average expense ratio is 0.51 percent. It may not seem like much, but it can add up over time and put a significant dent in your returns.

As an investor, it’s also important to remember that target date funds go by the calendar, not the market. The value of your target date fund balance is determined on the target date, regardless of what the market is doing. If you want more control over your investments during market ups and downs than target date funds allow, talk with a financial advisor.

The Bottom Line 

If you’re an average investor who is looking for a pretty simple, hands-off investment strategy that can autopilot you into retirement, a target date fund may be what you’re looking for. But if you’re looking for guidance and specific steps to help you reach your financial goals, both before and in retirement, schedule a no-obligation conversation with PAX Financial Group’s team of financial advisors in San Antonio, Texas to see how we can help. 

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This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.

Darryl Lyons

Darryl Lyons

CEO and co-founder of the PAX Financial Group, Darryl Lyons has been a licensed professional in the financial services industry since 1999. A lifelong Texan, Darryl began his career in the financial sector just one day removed from earning his bachelor’s degree in corporate financial management and accounting at St. Mary’s University. Throughout his career, he has won awards for recruiting and development from Fortune 100 companies. In January 2007, he chose to begin and develop his independent practice. He joined Andres Gutierrez and Joseph Schuetze to form the PAX Financial Group. Darryl also served as the Chairman for Brooks Development Authority. Shortly after his service, Mayor Julian Castro, named a park “The Darryl W Lyons Park” in honor of his service. He was named to the 2010 San Antonio Business Journal’s “40 Under 40 Rising Stars,” which honors people making a difference in business and in the community.

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