401(k) Investors
Are you in a Target Date Fund?
A target-date fund (TDF) is a hands-off investment option that automatically adjusts to more conservative investments as retirement approaches, making it popular with 401(k) investors who prefer age-appropriate asset allocation on autopilot. Target Date Funds are often used as Qualified Default Investment Alternatives (QDIAs) because they provide the plan sponsors with fiduciary safe harbor protections under the 2006 Pension Protection Act
1. As a funds of funds you have to pay the expense ratios of those underlying assets as well as the fees of the target-date fund (Sometimes 2 layers of fees)
2. Repositions from equities to bonds over a fixed glide path with no consideration of current market or interest rate condition
3. Target date funds change your allocation (percentage invested per fund) along a glide path so the portfolio becomes more conservative over time however the fund choices within the TDF often do not change for the life of the fund.
Three common drawbacks of TDF
What to consider:
1. Your overall financial goals and objectives
2. Your risk tolerance
3. An asset allocation fit for your investment goals
4. Asset location and tax optimization
5. Maximizing 401k Match, Roth Contributions, and understanding Mega Backdoor Roth
Common 401k Carriers
The principal value of target date funds is not guaranteed at any time, including at or after the target date, which is the approximate date when investors turn age 65. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short term investments and are subject to the risks of different areas of the market. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus more on income and principal stability during retirement. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility.
Asset allocation and diversification do not guarantee a profit or protect against a loss in a declining market.
Information provided should not be considered as tax advice from GWN Securities, Inc. or it's representatives. Please consult with your tax professional.