Investing in a target date mutual fund in your 401(k) is popular.
One of the main selling points of target date mutual funds is this. Investors closer to their desired retirement date are provided more principal preservation.
Younger investors with years to invest in their 401(k)’s should be taking the most target date mutual fund risks.
The exact opposite investment management results have taken place over the last year.
In the year ending on August 19, 2022, target date mutual funds for investors near retirement have lost 11.6%. Over the same period, target date funds for investors with over 40 years to invest lost only 7.9%.
A recent PIMCO survey of 401(k) consultants responded to these investment results. The response was that a loss of 10% or more is extreme. Unacceptable for those near retirement. An 11.6% loss is extremely unacceptable.
Target-date funds are fine for young workers who are starting to save in their 401(k) account. But what works well at one point in life might not work as well later in your working career.
This past year has been painful for target date fund investors nearing retirement. Especially in contrast to those who can’t afford investment losses. 401(k) investors retiring in 40 years.
The Standard & Poor’s publishes a target date fund index. This index is a composite of all target date mutual funds. 85% of the assets invested in target date mutual funds are “risky” at the target date.
This underperformance should be a wake-up call. For all target date 401(k) mutual fund investors.
A 401(k) mutual fund portfolio needs to be aligned with their retirement goals. And capacity for stock and bond market risks. Economic and stock market conditions change. A 401(k) mutual fund portfolio needs to reflect those changes.
Target date mutual funds offered in a 401(k) are the cheap and easy way out for your company. They are intended to be a “a one-size fits all investment option.”
A 60-plus year old worker does not have the same 401(k) investment objectives. As a 25-year old worker at the same company. Why would they both own the same target date mutual fund?
Target date mutual funds provide no preservation of principal protection. Even when the investor is only a few years from their desired retirement date.
There is a huge disconnect here. Between how 401(k) participants think they are invested in a target date mutual fund. And how they are invested in that same mutual fund. And the principal risks associated with the target date mutual fund.
Over the last few years, there is a growing number of 401(k) involved in excessive fee lawsuits. Is excessive risk taken by target date mutual funds the next 401(k) scandal?
Do not ask your company to fix this target date mutual fund issue. They are the ones who approved your 401(k) mutual fund menu. That includes your Human Resources Department.
Congratulations on reading this article this far. You know more about target date mutual funds than your Human Resources Department. If you do not believe me, call them.
The 401(k) investment management answer is clear. Independent, third-party, fiduciary level investment advice. Including a complete analysis of your default 401(k) mutual fund menu. Send me an e-mail if you are interested.
Ric Lager
Lager & Company, Inc.
lagerandco@comcast.net
