Assets in company 401(k) retirement plan target-date funds have exploded over the past few years. In plans that I routinely monitor for clients, target date mutual funds are by far the most popular mutual fund investment option.
The popularity of target date mutual funds is not necessarily a good thing. In most cases, company 401(k) target date mutual funds are not ranked among the best investment options o default company 401(k) retirement plan menus.
Individual company 401(k) retirement plan participants who make investment management decisions on their own need to give more thought to current investment performance and annual costs. The majority of target date mutual funds are poor investment options in both categories.
How much does your target date mutual fund cost every year?
How much of the mutual fund is invested in stocks; near all-time stock market highs?
How much of the mutual fund is invested in bonds; near all-time interest rate lows?
During the last great stock market decline from summer 2008 to spring 2009, I saw some company 401(k) retirement plan target date mutual funds lose 40-50% of their value. Those losses only reflect the U.S. stock market declines. Interest rates did not rise over that time.
Selecting a company 401(k) retirement plan mutual fund based on the year when you want to retire is not a sound investment management decision. Target date mutual funds with future years in their names are just a marketing gimmick designed by company 401(k) retirement plan providers.
Don’t guess on what your target date mutual fund owns. More importantly, don’t think for one minute that a target date mutual fund will preserve the last several years of your stock and bond market gains when the stock markets fall and interest rates rise.
Target-date funds are the textbook definition of “set-it-and-forget-it” company 401(k) retirement plan investment management. Where else in your life or working career can you make logical, disciplined, and organized decisions based upon your birthdate? And then not pay any attention to cyclical stock market and interest rate moves.
Individual investors have vastly different investment objectives and tolerance for stock and bond market risk. And no two company 401(k) retirement plan mutual fund menus are the same.
Target date mutual funds don’t solve individual company 401(k) retirement plan participant investment management problems. A much better option for would be to seek the independent, third-party analysis of a human advisor.
Ric Lager
Lager & Company, Inc.
