Two reasons Target-Date Funds may be a poor choice when investing for retirement

Target date funds may be a poor choice in your retirement account for two main reasons, both of which are a big drag on your portfolio:  FEES and TAXES

Fees

Target Date Funds typically have higher expense ratios - those pesky behind the scenes fees eating away at your hard-earned money.  The average target-date fund had an expense ratio of 0.62% in 2018, according to Morningstar¹.  This is much too high.  Most times, ComposedPro recommendations lead to an average expense ratio of less than 0.10%². This equates to a savings of over 0.50%.  That sort of savings adds up even after accounting for ComposedPro's advisor fee.   Estimate how much you could save with ComposedPro.

 Taxes

Target Date Funds throw all types of investments - such as U.S. stocks, taxable bonds, and foreign stocks - into the same ONE account.  Each of these investments may be better placed in other accounts for tax purposes.  If you invest in a Target-Date Fund in your 401(k), the underlying investments U.S stocks may be poorly placed in the 401(k).  For example, the U.S stocks placed in the 401(k) - a tax-deferred account - would eventually be subject to ordinary income tax rates when you make a withdrawal from the 401(k).  If they were instead placed in a taxable account, they may be eligible to be taxed at lower capital gains tax rates.  See ComposedPro's Asset Categories for more information about how ComposedPro places different types of investments in an attempt to save you on taxes.  We also provide an easy to understand Smart Location Score^TM that quickly shows you how well your investments are placed.

We call our solution to Target-Date Funds the Employer-Coordinated Portfolio^TM.  Check out the video below for more details on how ComposedPro solves the problems of Target Date Funds.

Disclosures:  

¹ "2019 Target-Date Fund Landscape".  Morningstar, Inc.   https://www.morningstar.com/lp/tdf-landscape.  Accessed July 25, 2019.

² Based on the investment recommendations that ComposedPro provides for managed accounts.  The average expense ratio at all stages of any glide path reaches a maximum expense of less than 0.10%.

Please note that higher tax-deferred balances could result in higher required minimum distributions (RMDs) in retirement.  This should be considered when implementing any contribution recommendations or other such strategies that seek to optimize across tax-exempt, tax-deferred, or taxable accounts.  If you are seeking to minimize RMDs, a contribution strategy that recommends a higher tax-deferred balance in your portfolio may not be appropriate.  Please consult your tax advisor when implementing any strategy that attempts to lower income taxes.

Clients may not realize the benefits of asset location discussed herein. Factors that affect an asset location strategy include, but are not limited to, market performance, the relative size of each account included in financial plan, the equity exposure of the portfolio, the frequency and size of deposits into the various accounts, the tax rates applicable to the investor in a given tax year and in future years, and the time elapsed before liquidation of any of the accounts becomes necessary.

Nothing herein should be interpreted as tax advice.  ComposedPro does not represent in any manner that the tax consequences described herein will be obtained or result in any particular tax consequence. Please consult your personal tax advisor as to whether ComposedPro's asset location strategy is a suitable strategy for you, given your particular circumstances. The tax consequences of asset location are complex and uncertain. You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS on your personal tax return. ComposedPro assumes no responsibility for the tax consequences to any client of any transaction.

Clients may not realize the full benefit of the fee reduction discussed herein.  Factors that could limit ComposedPro's ability to lower the average expense ratio for a client's portfolio include, but are not limited to, the options available within an employer account, investments the client marks as 'Do Not Sell', or other constraints contained within the client's portfolio.