Thinking on this recently, I’ve noticed most of my 401(k) plan sponsors offer target date funds as an option within their company’s 401(k) plan. Many have somewhere between 50% and 70% of their total plan assets invested in this choice.
Target date funds are comprised of equities, bonds, and other investments, and are geared to be long-term investments for individuals with a particular retirement age or risk level in mind. Age-based target date funds usually change their glidepath from aggressive (mostly equities) to conservative (mostly bonds or fixed income securities) as the target date approaches. Many leading financial organizations offer target date funds.
So, why are target date funds so prevalent? Well, they are a common default option within a company’s 401(k) plan. Many plans incorporate an automatic enrollment feature that directs an employee’s contribution to the default option based on the individual’s selected retirement age.
Simplicity also makes target date funds popular. A large portion of 401(k) plan participants have limited time or expertise in selecting individual mutual funds so, rather than trying to analyze all of the various investment options available under the plan, target date funds provide an easy solution for these folks.
Participants should consider these important factors when choosing target date funds:
- Cost of funds or expense ratios – These fees include the investment management of the fund’s portfolio along with the operating expenses of the fund.
- Asset Allocation breakdown – Some target date funds are managed more conservatively than others when an employee approaches retirement. These conservative funds’ glidepaths are normally managed “to retirement” whereas the more aggressive funds’ glidepaths are managed “through retirement,” recognizing that an individual may live another 25 or so years after his or her retirement age.
- Fund performance – Keep a watchful eye on the fund’s performance over a period of time relative to other target date funds available in the marketplace.
While target date funds are an easy solution in selecting an investment portfolio within a company’s 401(k) plan, are they right for your company and your workforce? It all depends on your availability, expertise in selecting funds and access to a financial advisor who can help individuals navigate through a plan’s various investment or fund options.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC, Frenkel Benefits – an EPIC Company, and LPL Financial are separate and non-affiliated companies.
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
Securities regulations prevent Tom from publicly responding to comments on this blog post. Third party posts found on this profile do not reflect the views of LPL Financial and have not been reviewed by LPL Financial as to accuracy or completeness.
The principal value of a target fund is not guaranteed at any time, including at the target date. All investing involves risk including loss of principal. No strategy assures success or protects against loss.