If you work at a Minnesota company, you need to understand the three main types of mutual funds available in your company 401(k) retirement plan. The three main types of mutual funds are target-date mutual funds, actively managed mutual funds and index mutual funds.
With target-date mutual funds, you select the fund with the date closest to your planned retirement. Most target-date funds have numbers like 2015, 2020, and up to 2050 in their description.
Target-date mutual funds are made up of other mutual funds. They are a fund of funds. They combine stock funds, bond funds and money market funds.
Target-date mutual funds take a more aggressive investment philosophy in their early years. The lower the number on the target-date mutual fund description, the larger the percentage of stocks invested in that mutual fund.
As the number description of target-date mutual funds increases, that mutual fund owns more bonds than stocks. Higher number target-date mutual funds get more conservative the closer you get to your planned retirement date.
Actively managed mutual funds are what most individual company 401(k) retirement plan participants choose to own. They make up the largest part of most company 401(k) retirement plan menus.
These mutual funds are managed by professional money managers who buy and sell stocks and bonds as they see fit. These mutual funds mostly invest only in stocks or only in bonds.
The investment management challenge for most individual company 401(k) retirement plan participants is to pick the best mutual funds available. Lack of timely information makes picking these mutual funds difficult.
Index mutual funds are set up to mimic a market benchmark such as the S&P 500 index. These mutual funds are lower in annual costs than target-date or actively managed mutual funds. More and more company retirement plans are beginning to offer a larger number of index mutual fund options.
I advise my individual company 401(k) retirement plan participant clients to own the lowest cost and best performing mutual fund options available to them. These options are usually the index mutual funds.
Ric Lager
Lager & Company, Inc.
