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Learn more about target-date funds to determine if they should be part of your 401(k) investment portfolio.
Today, one in seven 401(k) retirement dollars is invested in a target-date fund. These funds have set target dates which typically match an investor’s year of retirement. In their early years, target-date funds invest more aggressively in stocks. As they mature, they begin to adjust their asset allocation to less volatile investments, like bonds.
Many investors select a target-date fund from their 401(k) options because they seem easy and straightforward: they automatically adjust as you near retirement age to meet your investment needs.
But not all target-date funds are built the same, and a one-size-fits-all approach won’t work for everyone. Here’s what you need to know when reviewing target-date fund options:
1. Funds vary widely. They have different fees and philosophies. Some will be more heavily weighted in stocks than others, even as the fund nears its target date. Be sure to research the various target-fund options available to you to determine which most closely aligns to your risk tolerance and investment needs.
2. Funds may underperform. Like any other investment, a target-date fun is no sure bet. They will be affected by swings in the market, and you won’t know if the fund has hit its target until it matures—which could be up to 40 years from now.
3. Fund structures vary. Some funds are managed “to” the target retirement date. This means they begin to shift to more conservative investments as the target year draws near, and then may convert completely to retirement-income funds once that year is reached. On the other hand, some funds are managed “through” the target retirement date. In these cases, asset allocations are managed up to and past the retirement year, assuming that investors will stay invested once they’ve retired. These funds typically hold more stocks all the way up to the retirement date.
4. Funds may be automatic. If you were automatically enrolled in your company’s 401(k) plan, then you likely are invested in a target-date fund. These funds were made for those who don’t want to select investments or rebalance portfolios.
Whether or not a target-date fund is right for you will depend on several factors: your investment strategy, the fund’s asset allocation and historical performance, your risk tolerance and the number of years until you retire.
Learn more about how to select funds for you 401(k) plan.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
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