Why Entrepreneurs Should Think Twice About Target Date Funds

If you are a busy business owner in the prime of your life juggling finances, career and family – kids of your own plus aging parents – parking your liquid assets in a Target Date Fund (TDF) might look like the simplest investment solution to set it and forget it. After all, your day to day is full enough with the financial complexities and obligations of running your business.

TDFs may look like a one size fits all investment approach that sounds promising in theory.  However, TDFs could hinder entrepreneurs like you from maximizing your financial growth.

The major TDF red flags you should be aware of are:

• One-size-fits-all asset allocation and imperfect glide paths
• Conflicts of interest
• Post-retirement uncertainty
• No financial quarterback

One-Size-Fits-All Asset Allocation and Imperfect Glide Paths

A TDF’s asset allocation is determined by its glide path and target date that’s it. TDFs don’t account for investors’ preferences, goals, and risk tolerance and how they may change over time. For instance, you may need to be more conservative in the early years of building your business and more aggressive in future years when your personal balance sheet is more asset heavy – the exact opposite of most TDF asset-allocation plans.

Your financial goals and priorities also tend to evolve over time.  Relying on an imperfect glide path to dictate investment decisions can be costly since volatile market conditions often create opportunities to buy certain assets at a discount and sell others for a premium.

Generic glide paths do not consider your business or personal situations. As an entrepreneur, you need the freedom to tailor your investment approach as opportunities and challenges arise.

Beware Conflicts of Interest

TDFs tend to invest in multiple funds from the same fund family, which can introduce money manager risk, increase expenses, and reduce style diversification. No matter how much you like an asset manager, it’s rarely a good idea to only invest with one fund company. In the event the manager has financial, legal, or employee turnover issues, your entire portfolio may be at risk.

Furthermore, TDFs that only invest in one fund family may not be giving investors access to the best or most appropriate investments. Instead, they may hold funds that consistently underperform their peers or have above-average expenses because that is the only option in their fund family.

Holding more funds does not mean more diversification, either. If a fund family tends to favor a particular investing style in the market or bases its investment approach on one economic outlook, its TDFs may be overly concentrated in some markets and lack exposure to others.

TBD Post-Target Date

Entrepreneurs with families who are planning for retirement need personalized investment guidance along the way, but TDFs are not designed to offer that guidance.

Even if a TDF is managed through its target date, it may not achieve a retiree’s growth and income objectives. Once again, the fund’s glide path may result in an asset allocation that’s appropriate for some investors but not others. This can be even more problematic in retirement when investors have fewer opportunities to overcome financial setbacks – a common challenge for entrepreneurs who often endure years of financial challenges while building their business.

One-Stop Investors Only

As single investment solutions, TDFs generally (though not always) provide investors with acceptable levels of diversification and risk in relation to their target dates. That’s why they make most sense for investors who don’t own multiple investment products.

But if you are an entrepreneur who owns TDFs alongside other investments, you’re open to concentration risk and other potential diversification flaws. You’ll likely benefit more from having a financial quarterback, someone who can oversee and manage your entire investment portfolio to ensure it’s in line with your overall financial plan and goals.

If Not TDFs, Then What?

Entrepreneur business owners have more complex financial needs than the average investor, and those managing family obligations across generations can incur even further financial planning complexities. Economically, you’ve inherited more complicated markets, while also navigating the balancing act of professional success and personal wellbeing.

Our team can develop an investment plan unique to your goals and circumstances. CornerCap advisors can help you take advantage of opportunities that aim to boost your investment results and net worth for the long haul. If you’re ready to build the future you envision, we’re here to help shape the possibilities of how Life Appreciates™.