Is your target-date fund missing the mark? Our wealth advisors often answer questions about this investment vehicle.
It's easy to see why so many investors have questions about target-date funds. After all, they're easy, in a set-it-and-forget-it kind of way. But for many investors, that's not always optimal — which is why you may wish to consider a more hands-on approach that still helps you achieve your long-term financial goals.
Wealth Advisors Share Target-Date Fund Tips
Target-date funds' appeal is easy to understand; in fact, more than 70 percent of 401k plans include them. These hybrid mutual funds represent multiple asset classes and work toward a target date which, in most cases, is retirement. As the target date draws near, assets are re-allocated into more conservative classes. Asset allocation takes place automatically; for instance, investors in a fund with a retirement date of 2030 would see their assets move gradually from riskier assets with a higher return potential, such as equities, to more conservative asset classes, such as bonds and cash equivalents, as 2030 draws near.
Sounds simple, and it is. Target-date funds allow investors without the time, knowledge, or desire to take a hands-on approach to investing to sit back, relax, and let fund managers make the decisions. However, that means employees with 401ks must trust the fund decisions made by their employers. While there's nothing inherently wrong with this, this approach means that it's also easy to not really pay attention or understand if the investing decisions being made on your behalf are actually the best strategies to help you meet your personal retirement and financial goals.Recent research indicates that many target-date fund managers need to offer more diversification between asset classes, rather than simply focusing on what's known as the glide path, or the shift in emphasis from growth (i.e., stocks) to income (i.e., bonds) over time. This necessitates that plan sponsors should offer a wider range of investment options and not simply default investors into funds that the plan sponsors own. Known as "open architecture," this approach allows investors to have a truly diversified portfolio, and ensures that investment professionals are acting in investors' best interests.
Target-Date Funds and Your Comprehensive Financial Plan
How can you determine if your target-date fund is working for you? First, ask yourself if you've set the right retirement date. Given today's longer life expectancies and rising costs of healthcare, many investors end up delaying retirement and continuing to work longer than they'd planned. This means their target date was set too soon. As a general rule, when in doubt, choose the longer date.
Another potential problem lies in the fact that as the plan draws to an end, the amount of risk (and growth) is reduced in favor of income. That' means your buying power is reduced, too. You still need investment in growth assets during retirement; some wealth advisors suggest maintaining equity exposure in your portfolio until you hit 80 years of age.
Many wealth advisors recommend supplementing a target-date fund with other investments that diversify your portfolio across asset classes. While target-date funds definitely make investing easy, it's imperative that you maximize this type of investment and make it work for you.
Not all investment professionals agree on the proper role of target-date funds. While some investment firms promote them as an easy way to keep your portfolio property allocated over time, others argue that target-date funds aren't the optimal choice to maximize investments. Talk with us to help determine if target-date funds are appropriated for your financial goals.