We’re knee deep in retirement plan investment selection and there's no turning back now!
Last week
we talked about asset allocation and how the right mix of asset classes can help you balance risk and return. But what if you have better things to do than select investments in your 401(k)? First of all, you would never say that because you’ve been reading
StocSavvy
and you now have all the confidence in the world...and hopefully well glossed lip...(
btw
...
Fenty Beauty’s Hint Hint Luscious Lip Balm
is the truth!) But we digress...
Some of us would rather not select our own investments and that’s totally fine. In this world of automated everything the target date fund fits right in! A target date fund is a mutual fund (or sometimes a collective investment trust) that has an asset allocation that corresponds to the year in which an individual turns age 65. So, someone who plans to retire in the year 2050, would select a 2050 fund. Target date funds are professionally managed and their asset allocation adjusts over time to get more conservative the closer it gets to the designated retirement age. This is basically a “set it and forget it” option because you won’t have to adjust your asset allocation yourself over time. While target date funds are very popular and an obvious choice for those who don’t want to manager their plan investments themselves, there are a few things you should be aware of.
- TDFs are basically a mutual fund of mutual funds. Each underlying fund has an expense and sometimes the manager who is managing (called an overly manager) will also charge a fee. Pay attention to the fees as they could be higher than you expect. These days asset managers try to be competitive with their fees within retirement plans but check them anyway. Your employer may have selected a more expensive version of the same target date fund for your plan.
- Some TDF companies will use all proprietary funds for their underlying portfolios. This means that the same company is managing all of the funds. While some companies will say that this is a way to keep costs in the TDF down, are we to believe that a single company is the best at all asset classes? Or would you prefer a TDF that has open architecture where the underlying funds may be managed by the best managers that exist in each asset class? We’re not saying that proprietary TDFs are bad, just do your research.
- All TDFs are not created equal. A 2050 fund from one company may have a different percentage of stocks than another. Some TDF series' are more aggressive than others. Pay attention to the glide path of the TDFs you select. The glide path lets you know the starting percentage of stocks in the fund, the ending percentage of stocks at retirement and how quickly the portfolio adjusts to get more conservative overtime. This matters.
Have a great weekend Savvies!
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