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Not All Target Funds Are Created Equal: How is Your 401(k) Invested?

May 18, 2021

In 2020, the average 401(k) account balance hit an all-time high. This positive growth is highlighted by a record number of "401(k) Millionaires," implying their effectiveness as savings tools (Vanguard 2020.) Whether you're just starting to save or your account is seven figures, there is a great probability you own or have access to a Target Date Fund.

What are Target Date Funds, and Why Do They Matter?

Today, Target Date Funds (TDFs) receive about 80 cents of every dollar contributed to 401(k) plans (Fidelity 2020.) TDFs were created to serve as a simple and effective investment solution for participants. Instead of having to create an investment portfolio yourself, TDFs assign you a diversified portfolio based on your time horizon until your' target date' of retirement, generally age 65. All TDFs use "glidepaths," which manage risk at each phase of your career. Typically, glidepaths invest aggressively early on and become more conservative near retirement. If you did not initially select how to invest your contributions, they were likely invested for you in a TDF. You can calculate your 'target year' by adding 65 to your birth year. For example, a 40-year-old would likely be invested in a 401(k) 's 2045 Fund. Why? That's the year they'll be nearest to retirement, age 65. TDFs are well-rounded and may help you achieve your retirement objectives with minimal effort using this do-it-for-me strategy.

Know What You Own: Are the Target Dates inside your companies 401(k) the best investment option for you?

Although TDFs may work well for the majority, there are potential downsides. A One-Size-Fits-All approach to your retirement savings may not prioritize your unique objectives. In other words, they may not be the most suitable option for you.

Fees: Fees should always be a consideration. Just like taking an Uber costs more than driving yourself, you may be paying for the convenience of a fund manager doing the work you could do yourself.

Fund Selection: TDFs typically invest in a wide range of asset classes. However, they often use funds from the fund manager's own company. For example, a JPMorgan TDF invests only in JPMorgan funds.

Risk: The investment strategy for your plan's TDFs may not align with your risk tolerance. Nearly every TDF manager has a unique glidepath. A 2040 fund in one plan may have a much greater risk or growth potential than another. More plainly, the fund's risk-management style may not match yours. If you want to learn more about your plan's Target Date Funds, our tools and analysis can help give you the information you need to make an educated decision.



Sources:

https://institutional.vanguard.com/web/c1/how-america-saves/target-date-funds https://www.cnbc.com/2020/02/13/fidelity-there-is-now-a-record-number-of-401k-and-ira-millionaires.html

https://www.cnbc.com/2020/02/13/fidelity-there-is-now-a-record-number-of-401k-and-ira-millionaires.html