Jason Keffert and Susan Ziubinski of Morning Stars
Why do Target-Date funds make ideal IRA investments?
Discussing this topic is Jason Keffert, senior principal of the Morningstar Manager Research Team. The interviews have been compiled for length and clarity.
Q: Target-Date Funds tend to be a big investment in IRAs. Because if investors choose a Target-Date Fund that fits their time vision, the IRA is easily fit into other portfolios. Dive into that.
A: Target-Date Funds is a great set and forage for investors who don’t want to spend a lot of time. What funds should I choose to fill these buckets? The target date takes everything from the investor’s hands.
Another beauty is regular rebalancing, so your portfolio doesn’t break out of the bang. As you get older and closer to retirement, your portfolio should become a little more conservative. I don’t want to take a lot of risks when I retire, so I want to take a lot of risks when I’m young and spending a lot of time in front of me.
This is a great option for those who don’t want to spend a lot of time managing their investments, as they take care of everything for you.
Q: Vanguard was in the headline recently after making some substantial distributions from some of the funds on the target date. Vanguard’s distribution may have been large, but in general, funds on the target date are not a major investment in taxable accounts. Tell us why.
A: They are primarily designed for 401(k) plans. This is mainly where assets are located. Tax accounts like the IRA are thinking about taxes. Sothe bond portfolios that tend to be taxable bonds are taxed at their normal tax rates.
We also talked about rebalancing, which is when you sell your winners and buy the losers. Trigger a taxable event whenever you sell a winner. With a 401(k) or IRA, you don’t have to worry about them. Taxable accounts can be something like a headache.
Q: Many investors already have a relationship with a brokerage or asset manager. Can they feel comfortable going with someone who already has that relationship? Or are you paying to shop?
A: It’s always rewarding to see your options, but we warn that many brokerages will take steps to guide you to their own offerings. And that may mean that if you choose a different target date fund, an additional fee may be charged, which could kill the value proposition.
What we saw with target date funding is that the difference in return can be narrower.
Q: What are the important questions investors should ask before investing in a target dating fund?
A: I’d like to know what a glide path looks like and whether it suits your risk tolerance at different stages of life, but that may be difficult to know early.
A 25-year-old probably doesn’t have a good sense of what a risk tolerance of 60 looks like, but the shape of the glide path is really important.
I would also like to understand the underlying funds. Are they index funds, actively managed funds, or a combo of both? Maybe you have a preference.
Another thing you want to think about is the fee. Fees are especially important in IRAs where there may not be the advantage of getting the cheapest stock class, like you would do through company 401(k).
This article was provided to the Associated Press by Morningstar. For more personal financial content, visit https://www.morningstar.com/personal-finance
Jason Keffert is the senior principal of Morningstar’s Multi-Asset Strategy Assessment. Susan Dziubinski is an investment specialist at Morningstar.
Original issue: June 23, 2025, 12:12pm EDT
