When you get your first job, you’ll find a stack of paperwork on your desk with some ‘important’ information. Hidden in there will probably be some documents to enroll in the company’s 401(k). Whether you should or shouldn’t is a different conversation – actually investing in the 401(k) can be a headache on its own. First, you have to decide how much money you want to invest per paycheck, then work with human resources to get it set up, and then comes the hardest question- what do I invest it in?
You log onto the 401(k) website and sometimes there are 10 options and sometimes there are hundreds of investment choices: how do you narrow it down? That’s where a target date fund comes in, supposedly doing the hard part for you. You pick the fund with your designated retirement year & they will do the rest. Sounds great -doesn’t it? Maybe to some, yes- but there are a lot of unknowns about a target date fund.
#1- THEY CAN BE MORE EXPENSIVE THAN INDIVIDUAL FUNDS.
Every fund has fees and costs to it, but a target date fund comes with its own costs. So essentially, you’re paying for a combination of the cost for the underlying funds and the target date it’s in.
Think about that. If your first job is at 22- you will be paying that extra cost between then and retirement. Why would you want to do that?
#2- THEY WEREN’T DESIGNED WITH YOUR BEST INTEREST IN MIND.
The target date fund was invented as a “safety net” to companies for their employees to use who don’t know what and how to invest. This fund is designed from a company liability standpoint to alleviate some responsibility from the employer.
#3- THEY MAY NOT BE PROPERLY ALLOCATED IN CONJUNCTION WITH OTHER PLANNING YOU’VE DONE.
The fund assumes this is your only account, so if you do have other retirement savings or planned sources of income, it likely will not be properly allocated for your overall strategy.
For example, a 30-year-old in a retirement date-based target date fund might be invested in 80-90% equities and the balance in fixed income. In reality, they might not need that level of fixed income exposure. For someone who can’t touch the money for the next 30 years, they are giving up the potential upside of equities for fixed income- when in reality they could be more aggressive.
So what should you do?
The 401k should ideally be a “set it and forget it” piece of your portfolio - choose an allocation designed for the maximum growth for your risk tolerance. Being in the wrong funds can set you further away from retirement than you may think…
For Educational Purposes Only – Not to be relied upon as financial advice. Illustrated concepts are hypothetical and do not constitute a recommendation. Mutual Funds are sold by prospectus only and are subject to various costs and risks. You should carefully read the prospectus for complete information on the fund’s objectives, risk, charges, and expenses prior to investing. The principal value of the Retirement Funds and Target Retirement Funds (collectively the "target date funds") is not guaranteed at any time, including at or after the target date.3267053RB_Oct22