Everyone has to have a hobby, right? Lately, my hobby has been hating on company 401(k) retirement plan target date mutual funds.
My problem started around Christmas time with this article. It got so bad, that I wrote this anti-target date mutual fund article last week.
Maybe this third rant article will be the charm. Then I can get on with my individual company 401(k) retirement plan advice career.
The source of my anger is that many individual company 401(k) retirement plan participants that I meet with lately own a target date mutual funds. Most own more than one. These mutual funds have sprung up like weeds in company 401(k) retirement plan menus.
The reason for my “hating on” (that is actually a phrase in urbandictionary.com) target date mutual funds is simple. In most cases these mutual funds are among the worst company 401(k) retirement plan investment options to own.
Target date mutual funds have been sold as a “set-it-and-forget-it” individual company 401(k) retirement plan account investment management strategy. These mutual funds shift from owning less stocks and more bonds as an individual investor gets closer to retirement.
Where in your real life has “set-it-and-forget-it” ever worked?
You can’t “set-and-forget” your family, friends, or career? Let me be the one to break the bad news to you. It does not work in stock and bond market investing either.
“Set-it-and-forget-it” belongs on TV with Ron Popeil’s Showtime Rotisserie. Don’t forget the equally famous marketing phrase, “But wait, there’s more.”
There is always more with target date mutual funds. The last target date mutual fund that I analyzed for an individual company 401(k) retirement plan participant last week owned twelve other stock and bond market mutual funds.
No one needs to own 12 different mutual funds in their company 401(k) retirement plan account. Especially when there are annual investment management fees associated with each separate mutual fund owned.
Only one family of target date mutual funds is ever made available on a company 401(k) retirement plan menu. Target date mutual funds are always the more expensive actively managed mutual funds; not the less expensive index mutual funds.
The annual cost of the target date fund I recently found is 75 basis points. I would bet that there is an index mutual fund option on your current company 401(k) retirement plan menu for under 12 basis points.
Company 401(k) retirement plan providers are partly to blame for the popularity of target date mutual funds. Many companies have made them the default investment option on company 401(k) retirement plan menus.
The solution to the target date mutual fund trap is to find an independent, third-party ranking of all the mutual fund options on your company 401(k) retirement plan menu. These rankings compare annual costs and investment performance.
Don’t continue to be taken advantage of regarding the company sponsored appeal of target date mutual funds. Better-performing and lower cost mutual funds are likely available to you.
Ric Lager
Lager & Company, Inc.
