There are many different investment options available to a plan sponsor when initiating a new or administering an existing 401(k) plan but target date funds are a relatively new investment option.
They were started in the 1990’s as a way to provide investment selections for individual investors that are saving for retirement. They are typically mutual funds or common collective trusts and include in each fund a variety of individual investments with the asset allocation mix geared toward the risk level associated with the number of years remaining until retirement. Thus, the names of the funds tend to end with a year (2025, 2040, etc.) which indicates the estimated year the individual investing in that fund will seek to retire.
WHAT IS THE RISK LEVEL ASSOCIATED WITH TARGET DATE FUNDS?
If an individual is younger and has many years before estimated retirement, the fund will allow for a higher level of risk in the investment selection. Conversely, if an individual has fewer years until retirement, the investments will have a lower profile risk (i.e. the investments will move to more stable bond funds as the time period to retirement grows shorter). They are attractive to investors as the investment selection is done for them based upon an assumed risk level, based upon years until retirement.
TARGET DATE FUND CONSIDERATIONS
There are things to watch for when evaluating these investments.
First, review the fees charged. While you should expect to pay for the management of the fund, higher fees can eat away at retirement savings.
Review the total fees involved with the fund you are considering. Target date funds are managed funds so inspect the management style of those in charge of the specific fund you are reviewing. Their style should match your risk appetite and be wary especially if they are more aggressive than what you are looking for.
In a sudden market downturn, the plan may experience higher losses than employees can afford as they reach their anticipated retirement date.
Carefully evaluate target retirement dates and adjust holdings if the date moves. For example, if an employment situation changes and an employee decides they need to retire early, the target date fund should also adjust. In those situations, employees may need to move out of the target fund into another more stable asset allocation formula.
Retirement plans can be very complex. As an innovative firm Anders CPAs + Advisors specializes in 401(k) audits. We have the ability to offer assistance entirely off-site with little or no distraction to your daily office routine. We also offer flat-fee pricing so there are no surprises on your bill when the job is complete.
To get started, request a free 401(k) audit consultation below or contact the team at (314)-886-7913 to schedule an appointment.All Insights