Easy Steps To Understanding Target-Date Funds In Your 401(k)
Target Date Funds Are Easy to Use
Essentially, TDFs take an investor’s age and projected retirement year into account when picking investments. For beginning investors, they are an easy and manageable way to ensure exposure to an array of investments and spend less time researching. They’re simple and don’t require a lot of investing savvy.
“Target date funds are a ‘turn off my brain’ kind of thing, but when we turn off our brains bad things happen”
TDFs lose some of their luster for older investors. Once you’ve started building your assets, you should look into switching out of them. For one, because “when you’re in a TDF, you are not in control of how that fund is invested,” investment manager at PNC Wealth Management. Your individual risk tolerance is not taken into account, meaning, especially for older investors, that your portfolio is likely too aggresive. Outside of a TDF, you or a professional can tweak things based on your success at accumulating wealth and proximity to retirement, in “more suitable” funds.
When to Opt Out of Target Date Funds
They’re also actively managed—which LH advises against—which means they can come saddled with more fees than your typical index fund. One big fee difference: The expense ratio. The Wealth reports that the difference between a target-date fund’s annual expense ratio and an index fund’s is “0.71 percent vs 0.09 percent average, according to the Investment Company Institute.” That might not sound like a lot to get worked up over. Fees for these 401k funds can easily reach one percent or higher, which will eat away even more of your money. You always need to check the fees before investing in any product. One solution for older investors (59 1/2-plus) and those who have left a job is to roll their 401(k)s into IRAs. You have unlimited investment options that way. “We’re trying to make investing simple for people with target date funds, but investors are going to want to look under the hood,” says Tucker. “The easy button isn’t always the best option.”