Retirement: Do ‘target-date’ 401(k)s fill your needs?

Many employees make bad decisions when managing funds in their 401(k) plans, said Anne Tergesen in BusinessWeek. Some employers think they could produce better results for workers by managing their retirement funds for them, and policymakers have been inclined to agree. “Emboldened by recent legal and regulatory changes that shield employers from lawsuits, more are starting to make changes to 401(k) plans with the goal of taking the decision-making out of employees’ hands.” One way employers can do so is by offering employees what are known as target-date funds. “Employees simply select the fund that most closely matches their expected retirement date and the fund’s managers do the rest of the work.”

While target-date funds make it easy to save for retirement, the convenience comes at a price, said Christopher Sahl in Thestreet.com. “Many target-date funds are funds of mutual funds, and investors typically pay two layers of fees: one for the target-date fund itself, and another that is an asset-weighted average of the management fees of the underlying funds.” The average expense ratio for a target-date fund is 0.73 percent, according to Morningstar. “While that may not sound excessive, it doesn’t include any expenses charged by the underlying funds.” Tack on that fee, which averages 1.37 percent for diversified U.S. equity funds, and you’re looking at management fees of more than 2 percent.

There’s an even bigger problem with target-date funds, said Eleanor Laise in The Wall Street Journal. Not everyone with the same target retirement date shares the same investment goals or level of risk tolerance. So, some companies are offering “souped-up” target-date funds designed for different financial situations, and mutual funds are developing “multiple flavors” of target funds, such as conservative, moderate, or aggressive. “Some individuals are using a host of strategies to make these off-the-shelf funds a better fit.” Rather than choose a fund that coincides with his 2030 retirement target, Scott Nunn of Wilmington, N.C., opted for a 2050 target fund, which by design is more aggressive. “I needed to roll the dice a little bit,” Nunn says.

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