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.!F8C66FDB-D42B-4E62-B26F-4B59E66335A4

About Paul Nichols

Paul is the founder of Financial Abundance, a Registered Investor Advisory firm and EDI, an Estate Planning Firm with offices in State College and Lewisburg. He has been working with individuals, families and businesses for over twenty years, including many Fortune 500 companies. He has educated tens of thousands of people through seminars, workshops and various international speaking engagements where he shared the stage with many notable individuals such as Ronald Reagan, Robert Kiyosaki (author of Rich Dad, Poor Dad), Mike Ditka, General Schwarzkopf, and Newt Gingrich to name a few.

In 2000, after many years of traveling to consult companies and individuals, Paul decided to relocate from Colorado to State College, PA (his wife’s hometown) to develop a local advisory firm.

Paul operates under the core belief that education plus understanding leads to clarity and confidence; resulting in peace of mind. He is a proud father of three and devoted husband of 20 plus years.

Some of Paul’s accomplishments:
Regular contributor to the Centre Daily Times, via the “It’s Your Money” blog
Featured in the movie Navigating the Fog of Investing
Regular contributor to Town & Gown as the publications Investor Coach
Host of the weekly iTunes Podcast, It’s Your Money
Member of the Western PA Better Business Bureau
Member of the Centre County Chamber of Business and Industry