There are actually several reasons to avoid TDFs, I only mentioned two of them in my post.
By far the number one reason to avoid TDFs is that they underperform the market. Take this fund that Allison is in, VTRLX, it’s almost 11% cash and bonds. That’s way too much for someone 32 years old to have invested for her retirement fund. AND IT’S GOING TO GET WORSE as the fund ages and they start selling stocks from the fund to buy more bonds. Right now she’s only losing around the 11% compared to the market, as 2050 approaches that number will climb to as much as 40% cash and bonds !!!
Using Jeremy’s calculator, I plugged in some numbers for comparison. Using Allison’s starting and ending ages of 32 and 59, and using $1000 as the starting balance as well as the monthly contribution for both calculations, at 9% per year the ending balance is $1,353,864. Changing the percentage to 10%, the ending balance goes up to $1,611,629. That difference in the growth percentage approximates how much she’s losing by being in a TDF with 10% of her funds in cash and bonds. AND THAT DOESN’T EVEN TAKE INTO ACCOUNT ALL THE YEARS THAT THE FUND AGES AND IS AT 15% CASH AND BONDS AND THEN 20% CASH AND BONDS ETC, ALL THE WAY TO 40% CASH AND BONDS.
BTW, I’m using CAPS just for emphasis, I’m not shouting
Let’s look at the performance of some 2020 TDFs. Schwab SWYLX gained 30% during the past 5 years, Vanguard VTWNX gained 18% over the same period, and Fidelity FFFDX gained 14% during the same time period. In comparison, the SP 500 gained 79% during that same time. I’m guessing the performance difference between these funds is largely due to the expense ratios. But the difference in the performance between these funds and the SP 500 is clear.
Brokerages love TDFs because they make investing easy for the average bear, and they have attracted thousands of new customers because of that. Many people ( the majority? ) would rather be shown a one size fits all investment rather than do some research. In some 401s and such the investor might not have a choice except to use a TDF, but if given a choice, an obvious winner emerges.