Do You Understand Your Target Date Fund?
Are you invested in a Target Date Fund (TDF) in your 401(k) retirement plan? Quick, describe what a TDF even is.
Don’t feel bad if you can’t. Few investors can… even though how you’re investing toward retirement is pretty important.
A TDF is a fund that starts and ends with a prescribed mix of stocks, bonds, and sometimes other investments. The fund’s managers automatically reallocate your TDF assets over time, decreasing stocks and increasing bonds, until you reach your final allocation by a set, “target” date. For example, in a 2040 TDF fund, you may start out with 70% stocks/30% bonds today, and end up with 30% bonds/70% stocks by 2040. (Or, if it’s a “through” vs. a “to” TDF, the allocation may take longer to glide into final form.)
To be clear, your TDF fund doesn’t promise to be the best solution for meeting your retirement goals by your target date. It simply promises a set allocation to stocks vs. bonds, etc. by a certain date.
And yet, many employees end up investing in TDFs based strictly on their age or anticipated year of retirement. Usually, that’s not because they’ve personally evaluated their employer’s 401(k) selections in the context of their unique financial circumstances. It’s because they’ve accepted their employers’ default 401(k) plan selection, no questions asked.
Why do so many retirement plans offer TDFs as the default? If you think it’s because they’re always best for you, think again. It’s because the Department of Labor (DOL) rules basically state: If you fail to make your own selection, and your employer puts your 401(k) assets into a reputable TDF, you’ll be hard-pressed to successfully sue your employer for breaching their fiduciary duty to you.
In other words, TDFs are a relatively safe tool for your employer… whether or not they’re your best bet.
In my opinion, that’s why TDFs have become most 401(k) plans’ most common selection. But common doesn’t mean best. Matching your retirement year with a fund that has the same year in the name isn’t necessarily going to end well for you. I typically prefer plans with flexible, well-built model portfolios. They’re still relatively easy for you to use and safe for your employer to provide. Plus, they let you select an initial allocation, and then modify it based on your own needs and market outcomes.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience, and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
