Goal-Based Investing vs. Target-Date Funds: Which Strategy Fits Your Business?

When designing a retirement plan for your business, choosing the right investment strategy is crucial for both your company and your employees’ long-term financial security. Two popular approaches—goal-based investing and target-date funds—offer distinct advantages and challenges. Understanding these differences can help you, as an employer, make informed decisions and search for “employer retirement plan advisors near me” to optimize your plan.

Target-date funds (TDFs) are mutual funds designed to simplify retirement investing. They automatically adjust their asset allocation over time, shifting from a higher percentage of stocks to more conservative investments like bonds as the target retirement date approaches. This “glide path” reduces risk as employees near retirement, making TDFs a popular default option in many employer-sponsored retirement plans.

Key Benefits of Target-Date Funds:

• Ease of use: Employees simply select a fund aligned with their expected retirement year; the fund manager handles the rest.
• Built-in diversification: TDFs typically include a mix of stocks, bonds, and other assets, reducing the need for employees to manage their own portfolios.
• Automatic risk reduction: The fund becomes more conservative over time, helping protect gains as retirement nears.
• Accessibility: Widely available in most 401(k) plans and IRAs.

Potential Drawbacks:

• Lack of personalization: All participants of the same age receive the same allocation, regardless of individual goals or risk tolerance.
• Variable fees: Some TDFs may have higher fees, impacting overall returns.
• Potential for underperformance: Actively managed TDFs may not always outperform their benchmarks.
• Limited flexibility: The preset glide path may not suit every employee’s unique situation.

Goal-based investing (GBI) is a personalized approach that structures investment strategies around specific financial goals—such as retirement income targets, business succession, or legacy planning—rather than just a retirement date. This method considers each participant’s unique financial situation, risk tolerance, and desired outcomes.

Key Benefits of Goal-Based Investing:

• Personalization: Investment strategies are tailored to individual or business-specific goals, not just age or retirement date.
• Risk control: GBI strategies can limit annual losses and better manage downside risk, especially during market downturns.
• Higher probability of goal achievement: Research suggests GBI can increase the likelihood of meeting retirement goals compared to traditional TDFs.
• Flexibility: Adjusts to changes in income, business needs, or market conditions.

Potential Drawbacks:

• Complexity: Requires more detailed planning and ongoing monitoring, often with the help of professional advisors.
• Resource-intensive: May involve higher administrative costs or require more engagement from both employers and employees.
• Gap risk: Dynamic strategies can occasionally experience unexpected losses, though these are generally limited with proper management.

Personalization

• Target-Date Funds: Low (age-based only)
• Goal-Based Investing: High (customized to goals) 

Ease of Use

• Target-Date Funds: Very high
• Goal-Based Investing: Moderate (requires planning) 

Risk Management

• Target-Date Funds: Automatic, but less robust
• Goal-Based Investing: Tailored, more robust 

Employee Engagement

• Target-Date Funds: Minimal
• Goal-Based Investing: Higher (goal-setting involved) 

Cost

• Target-Date Funds: Lower
• Goal-Based Investing: Potentially higher (advisory fees) 

Outcome Consistency

• Target-Date Funds: Standardized, market-dependent
• Goal-Based Investing: Higher chance of meeting goals

Searching for “employer retirement plan advisors near me” to work with can help you evaluate which strategy aligns best with your business objectives and workforce needs. Advisors can:

• Assess your company’s demographics and employee preferences.
• Design a plan that balances simplicity with personalization.
• Provide ongoing education and support to maximize plan participation and outcomes.

• Target-date funds are ideal if you want a straightforward, low-maintenance solution that works well for a broad employee base.
• Goal-based investing is better suited for businesses seeking a more tailored approach, especially if your workforce has diverse financial goals or if you want to maximize the probability of employees reaching specific retirement outcomes.

For most businesses, a combination of both strategies—offering TDFs as a default with the option for personalized, goal-based advice—can provide flexibility and meet the varied needs of your employees.

Ready to optimize your retirement plan? Consult with employer retirement plan advisors at Target Retirement Solutions to explore the best investment strategy for your business and empower your employees to achieve their retirement goals.