According to USNews.com, investments in Target Date Retirement Funds have shown unprecedented growth among investments for retirement, with numbers “approaching $400 billion, [and] with projected sales of $2 trillion by 2020.” The reasons for this popularity among those investing for retirement are twofold: 1) ease of fund management for investors and, 2) the default status these funds have enjoyed since 2006 – if 401k account holders do not select an investment, employer plans are allowed to “default” the employee’s 401k into a Target-Date fund.
What is a “Target-Date” Retirement Fund?
Essentially, a “Target-Date” Retirement Fund is a very low-maintenance investment vehicle that is designed to adjust the risk level of your investments automatically as you approach retirement age. By setting a Target Date for your retirement when you establish the account, a single investment vehicle, you let the fund manager know when you expect to retire. As the years pass and your target date approaches, the fund will automatically begin to adjust the asset allocation between stocks, bonds, and cash equivalents, becoming more conservative as you age.
Target-Date Retirement Funds simplify investing for retirement
The appeal of these types of funds when investing for retirement is compelling – leaving the balancing and rebalancing of the fund’s investments in the hands of the fund itself, requiring little or no participation on the part of the account owner – you. In fact, many employer sponsored retirement plans have begun to use target funds as a default investment for their employees – a definite improvement for investors who don’t know how, and who don’t want to take the time, to figure out how to invest their 401k savings for themselves.
Is there a down-side to Target-Date Retirement Funds?
Yes, there can be. First, there is no standardized allocation system for a given retirement date among the various funds. There can be significantly different allocations from one provider to the next, and providers continue to adjust their allocation strategies over time. Next, management fees can also vary. Though the current trend is toward lower fees for managing 401k funds, including for Target-Date funds, some plans continue to offer high-fee funds.
Set it but don’t forget it – review your Target-Date Fund’s investment mix annually
Remember that the target date you select drives the “risk profile” of the investments in the fund and, ultimately, your investment returns. Target-Date Retirement Funds are not so maintenance free that you can simply “set it and forget it.” As you approach retirement and your fund balances grow, be sure to track the mix of investments in your Target-Date Funds. Although the fund determines the mix of stocks, bonds and cash within the fund, you can select a fund with a different target-date to adjust the overall risk of your retirement account.
Tamarind Financial Planning is here for you, with individual financial planning strategies, personal investment management techniques, and investments for retirement to help you set, meet, and exceed your financial – and life – goals.