More than half of 401(k) participants invest in target-date funds, but are they right for everyone? This week, Craig Siminski, of CMS Retirement Income Planning, shares an article providing an overview:
These “all-in-one” funds are often the default option in workplace plans, and their apparent simplicity appeals to many investors.
But target-date funds are not as simple as they appear to be. Like all investment strategies, they have strengths and weaknesses.
Focused on Time
Target-date funds offer a professionally managed mix of assets — typically a combination of other funds containing stocks, bonds, and cash alternatives — selected for a specific time horizon.
The target date, usually included in the fund’s name, is the approximate date when an investor would begin to withdraw money for retirement (or another purpose, such as paying for college). An investor expecting to retire in 2045, for example, might choose a 2045 fund. As the target date approaches, the fund typically shifts toward a more conservative asset allocation to help conserve the value it may have accumulated and potentially provide income.
One Size May Not Fit All
Target-date funds utilize basic asset allocation principles that are often used to construct more complex portfolios, but the allocation is based solely on the target date and does not take into account the investor’s risk tolerance, personal goals, asset levels, sources of income, or any other factors that make an investor unique.
An investor with $200,000 in a target-date fund has the same asset allocation as an investor with $20,000 in the fund. An investor who also has a pension and might be comfortable taking more risk with 401(k) investments is placed in the …
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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 21 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.
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