You're saving for retirement, and the first thing you see is a list of fund names.
Some people freeze and put off choosing. Others look for a simple approach.
If you are in a workplace retirement plan, you may be automatically placed into an investment known as a target-date fund. You can usually recognize these because the fund names all end in a year that's supposed to correspond with your retirement age.
"Target-date funds tend to be very attractive to investors who don't want to consistently manage their investments," said J. Kevin Stophel, a certified financial planner at the advisory firm Kumquat. "But consumers [generally] do too little homework when selecting a particular fund."
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Instead of picking a bunch of funds and trying to balance between stocks, bonds, international and domestic, a target-date fund is more like one-stop shopping.
You invest in it fully, without having to think about your asset allocation. They're attractive to investors who don't want to have to pay too much attention to managing their investments.
These funds are created to automatically rebalance to an investment allocation that grows more conservative as one gets closer to retirement or the target date, Stophel says.
The asset allocation generally starts out more aggressive, since the investor has several decades until retirement and can ride out some bumps in the market. The nearer to retirement, the more conservative the mix of investments.
Even though target-date funds are advertised as a hands-off investment for people who don't want to fuss, it's still important to research the investment company and the expense ratios. You'll want to know how much you are paying for convenience. Another thing to look at: How the target-date fund is rebalanced through the years.
As an all-in-one investment, these funds are pretty good, says Nick Holeman, a CFP with Betterment for Business, the robo-advisor. "They're also not as good as they could be," Holeman said.
Holeman dislikes several aspects of target-date funds. There's too much time between fund dates to give a truly customized experience. A 26-year-old might be in a fund set for a 2055, but what if this employee hopes to retire several years earlier or later? They're also biased toward their own funds. If you're in a Fidelity target-date, you're investing only in Fidelity funds.
"They handle the investments, but retirement planning is so much more than just investments," Holeman said. "They won't tell you if you're saving enough or if the risk tolerance is right for you."