Chances are your 401k offers several investment options, including a Target Date Fund. (TDF). These funds are intended to be the sole fund you select. They are diversified and adjust their investment mix as you near retirement, but they are often misused.
Missing the Target
Mark Eckman | November 27, 2019
USE THE RIGHT tool for the job and you’ll get the best result. If you need to connect two boards, you could use a hammer and a nail or a screwdriver and a screw. Either methods work—and they’re certainly better than banging in a screw with a hammer, which I’ve seen tried. It was not effective.
Participants in 401(k) plans, alas, display similar behavior with target date funds, or TDFs. A TDF offers a diversified portfolio in a single fund, with the mix of stocks and bonds changing as you approach retirement. When used correctly, the fund’s asset allocation should be appropriate for your age—aggressive while you’re young and becoming more conservative as you age. There’s no need to trade or adjust the mix. The fund does that automatically.
The evidence, however, suggests many people use TDFs incorrectly. Vanguard Group found that 52% of 401(k) participants have invested in a TDF, making the funds a popular choice for retirement money. But it seems many folks don’t stop at one fund. Morningstar studied TDF users and found many also invest in other funds—sometimes another TDF and sometimes other funds offered in their 401(k) plan. Result: These additional funds change the retirement saver’s asset allocation, so it may no longer make sense, given the employee’s expected retirement date.
Read the full story at the link below