Target Funds & 401(k) Plans

A number of years ago, employers began to include Target Date Funds as choices in their 401(k) plans.

The idea behind these investments, sometimes called “Lifecycle Funds,” is to help you to easily allocate your retirement plan contributions. Essentially, you would select a Target Date Fund that was “dated” close to the year you planned to retire, and, often, not include any of the other investment choices available in your company’s plan. For example, if you want to retire in 2015, you might select “Target Date Fund – 2015.” If you thought you would begin to enjoy your Golden Years in 2020, then you might choose “Target Date Fund – 2020.

Generally, you are told that the closer you are to retirement, the more conservative your Target Date Fund was supposed to be. As time marches you closer to your retirement, these funds are supposed to automatically reposition to a more conservative mix of stocks and bonds.

But it is not as simple as it sounds. That’s because once you select a Target Date Fund, then it is the fund manager – and not you – who determines the fund’s investment strategies and makes all of the asset allocation decisions. And the strategies of one investment manager can be wildly different than that of another investment manager for the same target date year.

According to a report issued on January 31, 2011 by the Government Accounting Office, “between 2005 and 2009 annualized TDF [Target Date Fund] returns for the largest funds with 5 years of returns ranged from +28 percent to -31 percent.” This range of investment performance was not what many investors expected.

Click on the 2-minute video linked below for more of the pitfalls of Target Date Funds. I think you will enjoy it.

http://www.marketwatch.com/video/asset/what-to-watch-for-in-target-date-funds/F8C66FDB-D42B-4E62-B26F-4B59E66335A4#!F8C66FDB-D42B-4E62-B26F-4B59E66335A4