There has been quite a bit written recently, mostly negative, about target date funds. It is hard to understand why since they provide 401k plan participants with:
- A professionally selected, diversified and managed investment portfolio at a competitive cost.
- An accessible and time efficient approach to investing for those “set-it and forget-it” retirement plan participants who wish to spend as little time as possible managing their retirement plan balance.
- A much better investment solution than anything that existed previously for those “set-it and forget-it” retirement plan participants. Keep in mind that before target date funds became widely used, these participants might select where to invest their balances using methods that did not ensure diversification, appropriate risk exposure, etc.
- Flexibility. 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.
- A way to invest that is far superior to the fatally flawed risk-based approaches (conservative, moderate, aggressive, etc.). Risk-based portfolios require retirement plan participants to change the portfolio they are invested in when their risk tolerance changes. Ability to take on risk changes as participants age or when they experience a change in family status. Most participants in risk-based portfolios never take the time to make these adjustments and, as a result, end up in a portfolio that is too risky. These investors often learn that they have taken on too much risk only when the market falls and they have experienced losses which were 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 risk tolerance as participants age.
Full disclosure here – I derive no benefit from recommending target date funds. I just have a hard time understanding why many commentators have been negative on target date funds recently.
The target date concept is still in its infancy. Although most target date series are not a perfect fit for every employee population, the product is evolving to meet the changing expectations of the marketplace.
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.