Target date funds have become more and more popular within 401k plans, especially with plan fiduciaries as the default setting for automatic enrollment. These set-it-and-forget-it funds are a “fund of funds,” combining several different mutual funds under one superfund designed with a specific retirement date in mind. As the investor ages, the mix of stock to bonds and cash equivalents changes to decrease the investor’s risk. This does not mean there is no risk to the investor at retirement. This fund is not a guarantee and each investment manager who manages this target date fund may have a different formula for acceptable risk as retirement approaches.
These target date funds are also very expensive relative to other funds that may be available within your 401k plan. Because they are a “fund of funds,” you pay for the fees associated with each mutual fund within the target date fund as well as the fees charged for overall management. It may be possible to create your own portfolio with a mix of stocks and bonds from index funds that are available within your 401k plan, but this will require you to be the manager yourself and make the necessary adjustments to risk as you age.
When evaluating whether to invest in a target date fund, consider:
- Are you willing to spend the time to manage the exposure risk yourself?
- Are you willing to give up the additional returns you could potentially save by managing the exposure risk yourself?
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