The brochure had a picture of a couple on a beach. The man was holding a fishing rod. The woman was reading a book. The headline said “Your retirement. On autopilot.” I was at a client dinner in Singapore, and the fund manager slid the brochure across the table. He said this was the easiest way to invest for retirement. Pick the year you turn 65. Buy the fund with that number. The fund does the rest. It gets more conservative as you get closer. You never have to think about it. I nodded. Then I asked him one question. What’s the fee on the underlying funds? He smiled. That’s when I knew I needed to look under the hood.
I was in my early forties when I first bought a target date fund. I picked the one with my retirement year. I set up automatic contributions. I told myself I was being responsible. For two years, I didn’t look at it. Then one afternoon I opened the statement and started digging. The fund was holding twenty different underlying funds. Some had fees I didn’t recognize. There was a fund of funds fee on top of the fees of the funds inside. I took out a calculator. The total cost was more than double what I thought I was paying. I had bought convenience. Convenience turned out to have a price tag.
Here’s what I wish someone had shown me with a measuring cup. A target date fund is like a pre-made meal kit. Everything is in the box. The protein, the vegetables, the seasoning. You just heat it up. But you don’t know how much of each ingredient you’re getting unless you read the label. Some meal kits are mostly rice. Some are mostly vegetables. The year on the label tells you the box is designed for your timeline. It doesn’t tell you what’s inside the box. And it definitely doesn’t tell you how much you’re paying for the convenience of not having to chop your own vegetables.
I had a reader from Manila who had been investing in a target date fund for eight years. He had automatic contributions from his paycheck. He never looked at it. One day he asked me to review his portfolio. I pulled up the fund’s holdings. The equity allocation was 85%. He was eight years from retirement. The fund’s glide path was supposed to be at 50% equities by now. But the fund had been drifting. The managers had been slowly increasing the equity allocation because they wanted to boost returns. His retirement fund was taking more risk than he thought. He had no idea. He trusted the date on the label.
I keep a kitchen timer on my desk now. When someone shows me a target date fund, I set the timer for fifteen minutes. That’s how long I spend looking at the glide path. A glide path is just a fancy term for how the fund changes over time. I want to see the actual percentages. Not the marketing version with a smooth line going down. I want the table that shows what percentage is in stocks, bonds, and cash at each interval. If that table isn’t in the first three pages of the fund summary, I close the brochure. The date on the front is the hook. The glide path is the actual product.
The roll of tape in my drawer is for something else. When I look at a target date fund, I tape over the year on the cover. Then I look at the fees. A target date fund can have fees layered three ways. The fund itself charges a fee. The underlying funds charge fees. Sometimes there’s a separate fee for the “manager of managers” structure. I add them all up. If the total is over 0.5%, I ask myself why I’m paying that much for something I could build myself with three index funds and a calendar reminder once a year. The answer is usually convenience. I’ve learned that convenience in investing costs about 0.3% to 0.5% per year. Over twenty years, that’s a lot of beach vacations.
I had a colleague years ago who worked at a firm that managed target date funds. He told me something I never forgot. He said the date on the fund is the most important marketing decision they make. The actual asset allocation is the second most important. Sometimes the two don’t match. He said some firms push the equity allocation higher on funds with closer dates because higher returns look better in marketing materials. He said they count on people not reading the glide path. He was right. Most people don’t. I didn’t. Not until I got burned.
I still own a target date fund. It’s in an old retirement account I haven’t touched in years. I’ve looked at the glide path. I’ve added up the fees. I’ve decided to keep it because moving it would trigger a tax hit I don’t want to deal with. But I don’t add new money to it. I build my own now. Three index funds. A calendar reminder once a year to rebalance. The whole thing takes me about twenty minutes. The cost is one third of what I was paying.
The reader from Manila called me last week. He had sold his target date fund. He built his own portfolio with a few index funds. He said he felt better knowing exactly what he owned. He said the date on the label had made him feel safe, but the safety was an illusion. He thanked me. I told him not to thank me. I told him I had made the same mistake. I told him about the measuring cup. He laughed. Then he asked me if I thought target date funds were bad. I told him no. I told him they’re fine if you read the fine print. I told him most people don’t. He asked me if I thought he would have read the fine print if I hadn’t pushed him. I didn’t answer. We both knew the answer.
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