Since the Pension Protection Act in 2006, target-date mutual funds have become the most popular investment choice in many 401(k) retirement plans.
Target-date funds are a “fund of funds”. These mutual funds don’t investment in stock of individual companies. Target date funds own other mutual funds.
Target-date mutual funds are the most passive stock and bond market investment management strategy available to individual company 401(k) investors. If you want to retire in nine more years, you would choose the “XYZ target-date 2030” fund.
Magically, the target-date mutual fund you choose knows your stock and bond market risk tolerance. Even more magical is this target-date mutual fund recognizes how much stock and bond market risk is appropriate for your age and financial circumstances.
Based upon your age and desired retirement date, a specific target-date fund will have more money allocated towards stocks rather than bonds. Or bonds versus stocks, depending upon the degree of magic.
How does a 60-year-old nearing retirement investor have the same tolerance for stock and bond market risk as the most recent 20-something hired by the same company to participate in the same company 401(k)?
Where in the hell is the financial planning and stock market risk management application in that idea? I am not even going to comment on the lack of a fiduciary level of investment advice.
Even worse are the high target-date mutual fund annual costs. The big-name 401(k) custodians such as Fidelity and Vanguard have index funds with expense ratios as low as 0.04%. But their target-date mutual fund expense ratios average 0.51%.
Here is a target-date mutual fund marketing message that makes the most sense for the average company 401(k) participant.
“Don’t worry about a thing. Go back to watching Netflix and planning your first post-COVID family vacation. Just invest all your annual company 401(k) contributions and company-matching contributions in this target-date fund. Just guess at your retirement date and we will do the rest. Don’t pay attention to the annual costs. It will all work out before you retire.”
Where else in your personal or professional life are you offered a similar deal? Have you ever taken a “set-it-and-forget-it” mindset to anything else that mattered in your life?
Well, you are supposed to do the same thing with your company 401(k) target-date mutual fund. And pay the highest annual fees in your 401(k).
Ric Lager
Lager & Company, Inc.
