I have analyzed the default menu of mutual fund options in dozens of Minnesota company 401(k) retirement plans. I can make the following statement with a high level of confidence and professional experience. Target date mutual funds scare me.
Recent articles tell me that I am not alone. No less than the SEC Commissioner shares my concerns. Are Target Date Funds a Ticking Time Bomb?
A target date mutual fund is likely the default investment option in your Minnesota company 401(k) retirement plan menu. The default option is where your retirement plan money goes if you do not choose another option available to you.
The investment strategy promoted with target date mutual funds is simple. Pick the approximate date your retirement. Then buy the target date mutual fund with the same year in the mutual fund name.
Let’s say that you are 50-years-old now. You want to retire when you are 65. You would then buy a target date mutual fund with the year 2030 in the title.
A 2030 target date mutual fund owns fewer stocks and more bonds the closer it gets to 2030. By the time that the year 2030 arrives, the mutual fund will be entirely invested in bonds and cash.
A target date mutual fund is promoted as an autopilot investment for your company 401(k) retirement plan account. These mutual funds are popular choices for individual investors who don’t want to be bothered with managing their individual company 401(k) retirement plan accounts.
There is nothing else in your life that can be managed on auto pilot. Your family, your kids, your parents, your friends don’t manage themselves. Neither does your working career. Do you really think that your company 401(k) retirement plan money can manage itself?
Interest rates are near all-time lows. When interest rates rise, bonds lose value.
The U.S. stock market is near all-times highs. The six-plus year old stock market advance is going to come to an end at some point.
Target date mutual funds are advertised and promoted as a “set-it-and-forget-it” company 401(k) retirement plan investment option. There is no chance on earth that those mutual funds are going to provide a stock and bond market risk management strategy when the trends in interest rates and stock prices change.
If you currently own a target date mutual fund in your company 401(k) retirement plan account, please do yourself a very big favor. Have an investment management game plan in place when interest rates rise and the stock market falls.
Ric Lager
Lager & Company, Inc.
