By: Travis Cruger
If you have all of your 401(k) invested in a target datebrfund (TDF), you’re not alone. Target date funds are very popular among 401(k)brplan participants. According to a study by the Investment Company Institute,br52% of 401(k) participants held target date funds in 2015 [1]. TDF’s arebrpopular because they offer simplicity and automation. However, TDP’s havebrseveral disadvantages that can have an extreme impact on your nest egg.
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First of all, there shouldn’t be a “one size fits all” whenbrit comes to constructing an investment portfolio. Financial situations and riskbrtolerances are unique to each investor, and asset allocations should not bebrdetermined solely by years until retirement and/or age of the investor.
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TDF’s are considered funds of funds, meaning they are fundsbrcomprised of several others. The main disadvantage with this is that thebrexpenses are considerably higher. On top of the expense ratio of the TDF youbrown, each of the underlying funds also have expense ratios to pay for the fundsbroperations and management team. All underlying funds are within the samebrfamily, limiting the investor from selecting the best fund for each allocation,bracross all fund families. This insures that you have a proven management teambrspecialized to the given market sector and asset type.
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Your retirement date may be too early to stop growing you’rebrnest egg. Individuals come to me when they retire and have all of their assetsbrin a target date fund, at or past the target date. This means that it is now atbrthe most conservative asset allocation. However, now the individual doesn’tbrneed the assets right away because the spouse is still working and they want tobrbe invested in the stock market to continue to grow their nest egg. Well, whatbrhas your nest egg done for you these past 10-15 years? It has most likely notbrdone much at all because it has been allocated for preservation rather thanbrgrowth. Furthermore, plan participants have different investment objectivesbrthat may not always fit the targeted allocation. For example: two individualsbrare participants in the same 401k plan, both 10 years from retirement, and 100%brinvested in the same TDF with the same target date. However, one of them justbrstarted saving for retirement and needs more growth then asset protection,brwhile the other has several million dollars built up and is primarily concernedbrwith asset protection.
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Asset allocations are much different from one fund family tobranother. They also may differ in the investment style used; i.e. active vsbrpassive, indexed vs managed funds, etc. With the lack of uniformity, planbrparticipants may experience very different rates of return throughout theirbrcareer.
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Target date funds are also very popular investments heldbrwithin college savings plans; just as much, if not more than in retirementbraccounts. The points stated above are relative to college savings plans asbrwell.
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If you are unaccustomed to investing and don’t want to takebrthe time to do it yourself, a target date fund may be the right choice for you.brIndividuals should do their homework and make sure that the target date fundsbrthat are offered in their retirement plan are up to par with the industrybrstandard. Consult with a financial advisor if there is any uncertainty.
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Doraine Wealth Management Group, Inc. (361) 866-8466Securities and investment advisory services are offered throughbrNEXT Financial Group, Inc., member FINRA/SIPC
Doraine Wealth Management Group, Inc. is not an affiliate ofbrNEXT Financial Group, Inc.
Opinions expressed in this article may not reflect the viewsbror opinions of NEXT Financial.
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