Last week, an individual company 401(k) retirement plan investment advice prospect asked me for a brief explanation of how target date mutual funds worked. I knew exactly how to respond to his request. I e-mailed the prospect a link to the article below.
In February 2016, Maggie McGrath and Jane Novack wrote what I think is the definitive article on the Forbes web site about the dangers of target date mutual funds in company 401(k) retirement plan accounts.
The article is linked below:
Is The Self-Driving Car In Your 401(k) Setting Your Portfolio Up For A Crash?
Maggie and Janet described target date funds as “the self-driving cars of the retirement industry.” There is no chance that I can every improve on that description. In fact, I use that analogy all the time with my individual company 401(k) retirement plan participant investment advice clients and prospects.
Target date funds hold a pre-selected mixture of stocks and bonds. The specific stock and bond mixed is based upon the number of years expected to a target retirement date.
In most company 401(k) retirement plan menus, target date mutual funds are set up as the default investment option. That means unless you provide your company 401(k) retirement plan provider with different information, every dollar of your company 401(k) retirement plan account will be invested in a specific target date mutual fund.
The main issue that I have with target date mutual funds is how they are promoted to individual company 401(k) retirement plan participants. The sales pitch is basically a “set-it-and-forget-it” investment option.
U.S. stock markets are close to all-time highs. U.S. interest rates are coming off all-time lows. Any target date mutual fund is up in value over the last eight-plus years.
Target date mutual funds don’t manage stock or bond market risk. They are designed as the definition of the “buy-and-hope” company 401(k) retirement plan investment management option.
That kind of a careless retirement plan investment management strategy never last forever. Interest rates are already rising. The stock markets will eventually fall. Now is an excellent time to know what you own in your company 401(k) retirement plan target date mutual funds.
Ric Lager
Lager & Company, Inc.
