Target Date Fund - My Retirement Plan: A Look Under the Hood

Saving for retirement is never easy, and target date funds can eliminate the guesswork in choosing your 401(k) plan investments. They offer one-stop shopping and set-it-and-forget-it investing — just what most people should be looking for.

Rather than choosing a mix of stocks and bonds to create a diversified portfolio, you can select a single fund designed to have the right combination of assets based on when you plan to retire — your "target date."

How do I know if I have this option available? Often, the name of the it will be branded to the fund company (we will call it XYZ Company) but almost always end with “Retirement 2020 or Retirement 2015, etc.” For example, an individual looking to retire in 2020, they should choose the “XYZ Retirement 2020” option.

Target Date Funds attempt to move the fund’s investments from a more aggressive posture in the earlier years to a more conservative composition as the “target (retirement) date” approaches. For those whom enjoy the “set it and forget it” approach to investing, target date funds are most ideal. No need to worry about rebalancing as you age.

But a look under the hood, we notice the age old “cost for convenience” decision. For example, one of the largest target date fund providers, Fidelity Freedom Series funds, has expense ratios in the .60% ballpark. The fund invests in a basket of other Fidelity funds that also have underlying expense ratios. Therefore, you are paying .60% for the “convenience” of a pre-packaged asset allocation based on some expected retirement date. But is it really worth it?

Choosing an appropriate plan provider and investment advisor is hard enough, but helping yourself and your employees find the appropriate investment choices for retirement can be tougher. Recent changes from the Department of Labor make it even more important you receive the assistance necessary. If you are unsure, speak with your investment advisor to schedule a review of your investment choices.