- About 80 percent of 401(k) plans offer target date funds.
- In all, assets in target date mutual funds approached $1.16 trillion as of the end of January.
If volatility in your retirement plan investments is giving you motion sickness, then maybe it's time to share your grievances with your boss.
Young investors in target-date funds white-knuckled their way through February because those funds are heavily invested in stocks for that age group and subject to short-term market swings.
"Investing for retirement is a long-term commitment — not a 10-day time frame — and as a result, the Freedom Funds are a lifetime savings solutions for shareholders," said Vincent Loporchio, a Fidelity spokesman.
Target-date funds are a mix mostly of stock and bond funds, but not always. As you age, the fund managers move more of the investments to less risky bonds from higher-risk equities. However, the mix of their investments can vary widely among target-date funds.
Investors in target-date funds at work face a conundrum: They don't necessarily have the savvy to choose their own investments, but they may find themselves questioning their employers' appetite for risk — especially if they saw their balances drop sharply last month.
Investments in target-date mutual funds approached $1.16 trillion at the end of January, according to Morningstar. Approximately 8 of 10 retirement plans offered these funds in 2015, the Investment Company Institute found.
Click the image below to enlarge.
"Target-date funds are intended to be 'set it and forget it': you hand it to professional managers and don't worry about the allocation," said Morningstar's Jeff Holt. "But it's important for investors to have a general sense of what they're investing in and what's the path for their investments."
Here's how you can get a better understanding of the risk in your 401(k) plan and what you can do about it.
Here's the bad news: For now, you may be stuck with the target-date fund your employer offers.
That's because certain 401(k) providers give employers a bundled package of services: One single company provides recordkeeping and administrative services, as well as the suite of target-date funds.
In that case, your employer may not be able to dump the funds without getting rid of the other services and selecting all new providers.
Still, you should understand your target-date fund's risk profile, starting with its glide path — the way the fund reduces its allocation to equities as the year of your retirement approaches.
The chart below (click to enlarge) shows how glide paths can differ even within the same fund provider.
"I would pay the most attention to age 65 to get a general sense of whether that's the amount of equity exposure you're comfortable with at that point," said Holt. You can find this information either on your fund manager's website or in your fund prospectus.
A target-date fund is only as good as its underlying components, which tend to be other mutual funds that cover stocks, bonds and cash.
No two fund families will be exactly alike when it comes to the components, even if the funds share the same target date.
For instance, Morningstar found that passively managed target-date funds tend to have fewer holdings in high-yield bonds and Treasury inflation-protected securities than their actively managed counterparts.
"In the early years, for one fund family, you'll find more 'risky' equity exposure to growth-oriented stocks, but toward the later years, it's more value-oriented equity exposure," said Aaron Pottichen, president of retirement services at CLS Partners in Austin, Texas.
Once you dig into your fund's prospectus to learn about the holdings, you should see a mix of U.S. and non-U.S. equities, as well as a combination of different bond portfolios.
"Investigating further, you'll get a sense of whether they're covering a good model of diversification," said Holt.
To comply with Labor Department regulations, your employer should have a written plan as to how they chose the funds.
"Any employee should be confirming with their investment committee that they're performing their due diligence," said George Fraser, managing director of Retirement Benefits Group in Phoenix.
Here are three questions to ask your human resources department or your investment committee at work.
- How did you arrive at these target-date funds? Ask why your employer believes that these funds are the best ones for employees.
Drivers of that decision can include worker demographics — a worker base of primarily older employees may call for target-date funds with a more conservative glide path — and employee deferral rates, said Pottichen.
- When was the last time you reviewed these funds? Worker populations change over time and so do fund managers. "Confirm that the committee is reviewing those investments on a regular basis," said Fraser. Quarterly is preferable but annually works.
- Will you share your fund comparison data with us? Get to know the other fund providers who were in the running and understand why your employer went with this particular one.
"If your company says 'I don't know,' then that's not a good thing," said Pottichen. "They aren't meeting their fiduciary obligations."