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 inc

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.

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