Did your face look like this when you first started your job and they told you to pick your investments for that 401(k) thing?
Does your face still look like this when you look at your statements?
You're not alone, and we're here to help.
Catching Up
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Mutual Funds & ETFs (in Plain English)
What is a Target Date Fund?
Most retirement plans like 401(k) or 403(b) plans offer what they call "Target Date Funds" for you to choose as potential investment options. The idea is very simple: they generally invest in a mix of different investments from all over the world according to your estimated retirement year (the Target Date).
For people that have a long way to go before retirement, the investment mix tends to be more aggressive (more stocks, less bonds), which means these will tend to have bigger ups and downs early on.
For people who are closer to retirement, it's the opposite. The investment mix will be more conservative (more bonds), which means these will tend to have smaller ups and downs as you get older.
Potential Advantages:
- The main draw to Target Date Funds is that they make it much easier for people without financial expertise to start saving and investing for retirement. You don't have to pick and choose from funds that you may know little to nothing about.
- The other main draw to Target Date Funds is that they automatically become more conservative over time. You don't have to manually change your investments all the time if this is the course you choose to take.
- Target Date Funds are generally very diversified, meaning that you're not putting all of your eggs in one basket.
Potential Disadvantages:
- One big potential disadvantage of a Target Date Fund is that you have very little control over how you're invested. Many investment managers of these funds change strategies, and you'd never know unless you read the confusing 200-page document that they send you.
- Your life and financial situation may cause you to want to be more aggressive or more conservative with your investments than the Target Date Fund invests. Not everyone needs/wants to be very aggressive when they're young, and not everyone needs/wants to be more conservative when they're older.
- Some Target Date Funds can have higher fees and costs than other options that might be available to you in your retirement plan.
The Verdict:
Target Date Funds could have a place in your investment choices. Some of the most important things to consider are your goals, your tolerance for risk, fee comparisons, and your knowledge of financial markets.
The best thing you can do is talk with your financial planner about your options. You'll get a much clearer picture of your options and get professional advice on what you should do.
If you don't have a financial planner, or you're considering a second opinion, click below to learn more about our 6-step "Get to Know You" process:
Our 6-Step "Get to Know You" Process
The target date of a target date fund may be a useful starting point in selecting a fund, but investors should not rely solely on the date when choosing a fund or deciding to remain invested in one. Investors should consider funds' asset allocation over the whole life of the fund. Often target date funds invest in other mutual funds and fees may be charged by both the target date fund and the underlying mutual funds. The principal value of these funds is not guaranteed at any time, including at the target date.
A diversified portfolio does not assure a profit or protect against loss in a declining market.