Target Date mutual funds have become the dominant Minnesota 401(k) company retirement plan investment option over the last few years.
In a recent national survey, over 51 percent of all company retirement plan participants currently owned at least one of the Target Date mutual fund option on their company 401(k) retirement plan menu.
Target Date mutual funds are named after future retirement dates. You see numbers such as 2020, 2025, and 2030 on some Target Date fund descriptions.
Target Date mutual funds have a “set-it-and-forget-it” mentality. The sales pitch is that the Target Date mutual fund will invest your money in the most appropriate stock and bond combination depending upon your expected retirement date.
Target Date mutual funds with dates far out in the future own more stocks versus bonds. Target Date mutual funds closer to 2015 own more bonds versus stocks.
Changing your stocks versus bonds ownership percentage as you get older does not qualify as an investment management strategy. Managing the money in your company 401(k) retirement plan account is not that easy. If it was, there would be many more successful company 401(k) retirement plan investors.
The reality is that there are no risk management guidelines for Target Date mutual funds. Two Target Date mutual fund for 2040 may have a 15-20% difference in the stock versus bond percentages currently owned.
The mutual fund companies on your company 401(k) retirement plan menu are in the business to gather as many company 401(k) retirement plan assets as possible. That is how they can generate the largest amount of management fees possible.
Retirement plan consultants have advocated for the addition of Target Date mutual funds to company 401(k) retirement plan menus the last few years. These mutual funds have been the “hot ticket” in the company benefits world.
Don’t bet the last several years of your company 401(k) retirement plan investment gains on a Target Date mutual fund. These mutual funds have no investment management track record in a rising interest rate environment. Many Target Date mutual funds lost over 50% of their market value in the last great stock market decline in 2008-2009.
Individual company 401(k) retirement plan participants need a stock and bond market risk management strategy. That strategy needs to reflect the changes in stock market risk levels and Federal Reserve interest rate policy. Target Date mutual funds don’t qualify in either category.
Ric Lager
Lager & Company, Inc.
