Does your company provide target date funds as an option in its 401(k) plan? Many 401(k) plans use them as the default investment for plan participants who do not select their investments under the plan. Target date funds do make investing much easier for participants by automating the asset allocation process, but they still require careful consideration both before and after the investment decision is made.
Target funds gradually shift their emphasis from more equity investments to more fixed income as the fund approaches its target date. They take emotion out of the investment decision-making process and prevent inactive participants from being indecisive. These funds are popular with plan participants who prefer to select an allocation and do not want to be distracted by the volatility in the market. They also do not need to be concerned about reducing their exposure to market volatility as they near retirement since these funds do that automatically.
Although all investments have some level of risk, regardless of their type, target date funds may share the same target date but have very different strategies and risk. As a result, participants should review the funds and the asset allocation to ensure they are comfortable with the level of risk. This means reviewing the investment mix, the fund’s risk level, performance and fees, which are available in the prospectus or fund profile.
Target date funds are designed typically to shift over time from a mix that is weighted toward stock investments in the beginning to more investments in bonds over time. They don’t, however, guarantee participants will have sufficient retirement income at the target date, and participants can still lose money.
As participants consider whether investing in a target date fund is right for them, they should consider:
– Their investment style and knowledge
– The strategy and risk of the funds
– How the investment mix will change over time
– When they will access the money in the fund
If a participant chooses to invest in a target date fund, he or she should keep in mind that the fund manager can make changes in the future without the participant’s approval – even changes that might create greater risk. Therefore, participants should monitor their target date fund’s investments over time.
Participants can learn more about target date funds by reviewing the Investor Bulletin created by the Department of Labor and the Securities and Exchange Commission here.
Your financial advisor can also answer questions about target date funds as well as assist you in designing a retirement plan that meets your company’s needs as well as your employees.