The target-date funds found on your company 401(k) retirement plan menu have been promoted endlessly both by your 401(k) retirement plan provider and your company.
What’s not to like? The mutual funds are advertised to automatically shifts your stock and bond market asset allocation to a more conservative mix as you get closer to your desired retirement date. Target-date mutual funds are the ultimate “set-it-and-forget-it” company 401(k) retirement plan mutual fund investment choice.
Unfortunately, the typical target-date mutual fund violates one of the most important investment management concepts available today. These mutual funds are largely invested in the worst asset classes found on your company 401(k) retirement plan menu.
The typical target-date fund focuses too much on U.S. stock and bond exposure to all available asset classes. These mutual funds don’t own enough of the best asset classes to own during an upward stock market cycle.
Would you bet on the New England Patriots or the Cleveland Browns to win the Super Bowl next year? Your target-date mutual fund has bet as much or more of your company 401(k) retirement plan account monies on both teams as even bets.
This leads me to the second big problem with your target-date mutual funds. The typical target-date fund over-allocates to stocks. There is not enough focus on stock market risk.
Consider the stock market risk management history of a 50/50 stock and bond target-date mutual fund during the height of the most recent 2018 stock market highs. Target-date mutual fund managers remained fully invested in the stock market at all times.
A truly risk-managed stock market mutual fund portfolio would have reduced the stock allocation in late November of 2018. Stocks became even more risky at the end of 2018.
There were some target-date mutual funds that lost 20% of their value during the last few weeks of 2018. I am not talking about random mutual funds. I am talking about some of the most popular target-date mutual funds found on hundreds of company 401(k) retirement plan menus.
You have to own more of the best mutual fund asset classes available to you when the stock market is going up. You also have to preserve the better part of your company 401(k) retirement plan principal in the early stages of a significant stock market decline.
The target-date mutual funds on your company 401(k) retirement plan menu have been promoted and advertised to provide you with the two most basic investment management capabilities—professional investment selection and stock market risk management.
The truth is, target-date mutual funds don’t provide either one.
Ric Lager
Lager & Company, Inc.
