There has been quite a bit written recently, most negative, about target date funds (TDFs). It is hard for me to understand why since TDFs provide 401k plan participants with:
Professional investment management at a low cost
Most 401k plan participants, if they purchased similar investment management services from a broker, would pay between 1.50% and 2.00%. Nearly all TDFs have expense ratios well below 1.00%.
A convenient way to invest
Target date funds provide an accessible and efficient approach to investing for those “set-it and forget-it” 401k plan participants who wish to spend as little time as possible managing their account. Keep in mind that the vast majority of your 401k plan participants embrace this investment philosophy.
There is a target date series for every employee population with choices that include passive or active management, “to” or “through” target dates and varying glide paths. Participants can take more risk by investing in an option with a target date later than their recommended fund, or less risk by investing in a nearer-dated fund.
A better option than target-risk funds
Target risk funds (e.g.; conservative, moderate, aggressive) are fatally flawed since they require 401k plan participants to change the fund they are invested in when their risk tolerance changes. Participants experience changes in their ability to bear risk as they age or when they have a change in family status. Most participants in risk-based funds never take the time to change their investment election and, as a result, often end up in a fund that is too risky. These participants learn they have taken on too much risk when the market falls and they experience losses which are beyond their expectations. Target date funds have professional managers who adjust the risk profile of the fund as time goes by to account for changes in participants risk tolerance as they age.
TDFs – much better than traditional balanced funds
Like target date funds, balanced funds provide exposure to both stocks and bonds. However, balanced funds do not offer participants a way to adjust their exposure to stocks and bonds as they age.
TDFs – much, much better than previous options
Target date funds provide much better investment solutions than anything that existed previously for those “set-it and forget-it” 401k plan participants. Keep in mind that before target date funds became widely used, these participants might choose where to invest based upon advice gained from a brother-in-law or some other less than appropriate source.
Full disclosure – I derive no benefit from saying nice things about target date funds. Although target date funds might not be perfect for everyone in your plan, remember that the target date concept is still in its infancy. Expect these professionally managed investment options to become an even better fit for your 401k plan participants as time goes by.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.