But that's only one side of the argument. Here's the flip side of that same coin: What if the 61-year old owner of that TDF goes on to live another 40 years? The article's author, Craig Israelsen of Brigham Young University, suggests that TDFs should hold equity positions of less than 10% as they approach their target date. That makes sense if the goal is essentially to simply live until the target date. But it makes no sense if the goal is to position the investor for decades of continuing income needs beyond the target date.

The Best Plan Is A Personalized Plan

This debate over the proper allocation as the target date approaches leads us to the central problem with TDFs: they ignore all of the personal variables that ideally should be taken into account when setting one's portfolio mix. A very generic guideline based solely on age may be better than no guideline at all (subtracting your age from 100 to determine your stock allocation is a popular example). But a better approach is to also incorporate all the relevant factors, such as age, health, risk tolerance, savings level, and so on. There's no way a TDF can do that, so it winds up being a very blunt instrument, not to mention one that varies widely in interpretation from one fund company to the next.

The reason these fund companies can't answer the question of "what is the optimal allocation mix for near-retirees?" is that there isn't any one-size-fits-all answer.

No two investors have identical attitudes toward risk and exactly the same financial circumstances. The generic approach offered by target funds cannot offer a truly personalized retirement-planning strategy.

That's not to say there's no place for TDFs in the investing landscape. As a default option in a company retirement plan, where surveys regularly reveal many workers are making terrible allocation decisions, a reasonable, low-cost TDF may be a vast improvement over what the typical plan participant would otherwise choose.

But in our view, investors are likely to be much better off keeping control in their own hands, rather than delegating important asset-allocation and diversification decisions to a target-fund manager. Maintaining control will help ensure that you have a personalized plan that aligns your investment choices with your particular temperament and goals.

Again, just to be clear, there is nothing wrong with investing in a target-date fund. If you have only a few investment choices in your 401(k) plan, a TDF may wind up being the best option for the time being. But before you invest, be sure to research the details, so you understand that fund's specific portfolio mix and "glide path" for moving toward more fixed-income investments as retirement approaches.

Mark Biller is the Editor at Sound Mind Investing. Since its founding by Austin Pryor 23 years ago, SMI has been providing clear, trustworthy, effective investment guidance to the Christian community. Some 10,000 subscribers look to its flagship publication, the Sound Mind Investing monthly newsletter, for biblical guidance on a range of financial issues and specific investment advice.

Publication date: November 8, 2013