Target date mutual funds have been advertised and promoted by company retirement plan sponsors as the “set-it-and-forget-it” alternative to managing your individual company 401(k) retirement plan account.
Target date mutual funds mix stocks and bonds in ranges from 90% stocks and 10% bonds to just the opposite; 90% bonds and 10% stocks, and all combinations in between.
Individual company 401(k) retirement plan participants are being lulled into a false sense of security by these target date mutual funds. Now, you don’t just have to take my word for it!
Recently, I read a study from BlackRock, one of the largest mutual fund companies on earth. The study pointed out the investment performance correlation between a 60-40 balanced portfolio of stocks and bonds and a 100% stock portfolio.
The BlackRock study found that a 60% stock and 40% bond portfolio had a .99 correlation to a 100% stock portfolio over the last 15 years. Even a 30% stock and 70% bond portfolio had a .82 correlation to 100% stocks over the same time period.
Target date mutual funds give individual company 401(k) retirement plan investors the false sense that they are balancing their stock market investment risks. The reality is not the case.
When the stock market goes down, the stocks you own in a target date mutual fund will also go down. When interest rates rise, the bonds you own in a target date mutual fund will fall in value.
There is nothing “balanced” or “diversified” about remaining 100% invested in a target date mutual fund. Target date mutual funds are not the safe investment option in your individual company 401(k) retirement plan account.
The reality is that a target date mutual fund is not any more or less safe than any other company 401(k) mutual fund option.
Ric Lager
Lager & Company, Inc.
