I wrote this article on April 27th, 2012 on my Golden Valley Patch Blog.
I have always had the opinion that it is a good thing to hate something. When I hate something it gets my blood pumping, keeps me more focused, and makes me work harder for my clients.
In the 401(k) advice business, there are a small handful of investment products that I hate. I never want any of my Minnesota company retirement plan participant clients to be financially harmed by these products now or in the future.
I go out-of-my-way in order to educate my clients on the true characteristics of the most popular retirement plan investment plan options. In these historically volatile stock market times, it has never been more important to preserve and grow your retirement plan account value.
I hate target date mutual funds.
As I have written in this space before, I see the company retirement plan menus of some of the largest public and private companies in Minnesota. I can speak with authority about “what is going on” in all sizes of Minnesota company 401(k) retirement plan offerings. That is the good news.
The bad news is that company retirement plan menus are beginning to all look the same. More and more I see these company retirement plan menus being taken over by target date mutual funds.
A target date mutual fund is in most cases the default company retirement plan option. This means that unless you inform your company retirement plan provider to the contrary, you will be automatically enrolled in a target date mutual fund in your company 401(k) retirement plan account.
Your enrollment in the default company retirement plan option means that all your individual company retirement plan contributions, along with your company matching contributions, will automatically go into the same target date mutual fund option.
Target date mutual funds are advertised as a “set-it-and-forget-it” company retirement plan investment option. In the description of a target date mutual fund option in your company retirement plan menu, you will very likely read about how a target date mutual fund will be managed according to your target retirement year.
The year that you intend to retire is described as your “target” year.
As an example, if you are 50 years old, and you hope to retire at age 65, you would likely to be urged to invest the largest part of your company retirement plan account balance into a 2027 target date mutual fund option in the company retirement plan menu. The year 2027 is approximately 15 years from 2012.
As the years go by, a target date mutual fund will automatically reset the mixture of stocks and bonds owned in the mutual fund according a predetermined formula.
As you get nearer to your projected retirement date, a target date mutual fund will reduce your exposure to stocks and own a larger percentage of bonds and money market.
The “sales pitch” in any target date mutual fund description is that once you decide which maturity date to own, all you have to do is keep contributing your company 401(k) retirement plan contributions to this mutual fund and let the mutual fund manager take care of the rest.
The commons sense investment management information not included in the “sales pitch” for target date mutual funds is that you should not retire in years with falling stock markets and rising interest rates. Like any other type of mutual funds, target term funds require a risk management strategy at all times.
In my 28 years of providing investment advice, any time I hear about an investment product that is promoted to be automatic; I get really nervous for my clients.
Target date mutual funds are just the latest retirement plan mutual fund gimmick product designed by the mutual fund industry. You have never been able to “set-it-and-forget-it” owning any other investment you have ever made in your adult life.
How has that investment approach worked out for your real estate investments over the last few years?
Target date mutual funds in your company retirement plan account are not any different.
Ric Lager
Lager & Company, Inc.
