Target-date funds are all the rage among retirement investors, making it easy to spread money among stocks and bonds and to rebalance as conditions change. Total assets in this sector topped $1.1 trillion at the end of 2017, up from $158 billion at the end of 2008, according to Morningstar. But is this too much of a good thing? Vanguard Group, the fund giant, reported recently that 51 percent of investors in 401(k) plans with the firm put all their money into a single target-date fund in 2017, and Fidelity Investments has similar figures. But some experts warn that this hands-off approach can backfire by failing to account for factors like the investors’ life expectancy, risk tolerance, income changes or loss of a spouse. Target-date funds are designed for the average investor, but few investors are truly average, and many advisors say those with heavy stakes in TD funds are wise to adjust to suit their personal needs. “Although they have substantial benefits, target-date funds ultimately provide too much of a cookie-cutter approach to asset allocation,” said Benjamin Sullivan, a planner and portfolio manager with Palisades Hudson Financial Group in Austin, Texas. “Not everyone retiring in a given year has the same risk tolerance, cash-flow needs and time horizon. Therefore, not everyone in a cohort should have the same asset mix.” “People need to be conscious and engaged with their investment,” said Alexander S. Lowry, director of the master’s program in financial analysis at Gordon College in Wenham, Massachusetts. “Outsourcing that responsibility to a target-date fund is a recipe for disaster, at least in the current investing climate.”

The mechanics

Not only could stocks turn down, but bonds in target-date funds could lose value if interest rates continue to rise — a toxic situation for a retiree needing income. A target-date fund, selected to match the investor’s expected retirement date, typically divides contributions into a mix of low-fee stock and bond index funds and subcategories considered appropriate for the investor’s age and years to retirement. A young investor will be heavily invested in stocks, but more of the fund will shift to bonds as safety becomes more important over the years. The fund also rebalances annually to keep to the current target allocation. If a surge leaves too much invested in stocks, for example, some will be shifted to bonds. That kind of fine-tuning is troublesome even for practiced investors, so target-date funds have been considered ideal for the inexperienced, especially those with small portfolios that are otherwise hard to diversify. That’s why they have become the “default” in many 401(k)s for participants who do not choose something else, often because they don’t pay much attention when automatically enrolled after being hired. Previously, surveys showed that too many employees invested too little and were too conservative, often allowing contributions to build up in money-market funds with very low returns.

Once people begin using a target-date fund, they go on autopilot and stop thinking about their investing [strategy]. Alexandra Lowry director of the master’s program in financial analysis at Gordon College

Vanguard says more than half of its 401(k) participants have all assets in a single target-date fund, up from 13 percent 10 years ago. “With the advent of TDFs, three-quarters of all participants now have broadly diversified portfolios — up from only half 10 years ago,” Vanguard said, emphasizing the positive side of TDF growth. Target-date funds are not designed to beat the broad market at all times, but to produce steady gains with low fees and minimal volatility due to broad diversification, and performance varies with asset allocation designed for a given target date. Target-date funds for investors retiring in 2050 have returned 8.48 percent a year for the past five years, compared to nearly 13 percent for funds tracking the , according to Morningstar. But this has been a period of strong stock growth, and TDFs generally do better than the S&P 500 when stocks fall. Now the question is whether this “fire and forget” approach has gone too far, since TDFs are generic products that cannot be fine-tuned to the investor’s individual situation. Two 30-somethings with three decades to retirement could choose the same Target 2050 fund that would put 90 percent into stock funds and 10 percent into bond funds. On the verge of retirement, the mix would be closer to 50/50.

But by then one of the two might have other savings, paid off the home and finished with college expenses. One might have a spouse with a good income, have a traditional pension, maximum Social Security benefit and an inheritance. The other might not be in such good shape. But their different investing needs would not be reflected in their identical TDF holdings. More from Quarterly Investment Guide: The hardest retirement question to answer isn't about money The dire ripple effect from a US-China trade war: A drop in foreign investment worldwide America's wealthy are moving to cash as market enthusiasm hits a wall “One issue with target-date funds today is that they really do not function well once you reach the target date,” said Jamie Hopkins, professor of retirement planning at The American College of Financial Services in Bryn Mawr, Pennsylvania. “At that point, there is no real mechanism or investment strategy inside the fund to deal with the challenges of generating retirement income or investing for income in retirement.” Many TDFs, for example, arrive at a final mix of stocks and bonds at the target date, then leave it the same for the decades that follow, even though the investor’s situation may change dramatically. Drawing income requires selling the fund’s shares, which trims each asset class the same amount, since each share mirrors the fund’s overall asset allocation. It might be wiser to sell more judiciously, but not possible to trim just stocks or just bonds. “Once people begin using a target-date fund, they go on autopilot and stop thinking about their investing [strategy],” Lowry said. “So they don’t consider the market cycle, whether their risk profile has changed, what the impact will be on other assets, etc. For example, we’re in the final inning of a historic bull market. And at some point in the not-too-distant future, we’ll be at the bottom of an awful bear market. These two points in time require a very different investment approach. But a TD fund approach doesn’t consider this.”

What to do?