Target Date Funds: A Logical Choice for the “Do It for Me” Investor

Large Growth, Small Value, Foreign Large Blend, Inflation-Protected Bond, High-Yield Bond…..

To those of us in the financial services industry, these terms make plenty of sense, as we deal with them on a daily basis, however, to the vast majority of retirement plan participants across the country, these terms seem confusing and moreover…..foreign (no pun intended).

Whether it is a result of poor participant education on behalf of the plan’s financial advisor or that the participants are unwilling to take the time to understand what resources have been made available to them…..the fact remains that plan participants are growing increasingly confused with all of the investment options available to them these days. The good news is that these participants are finding a “new” way to address this issue…in a BIG way…

Specifically, the emergence of “Target Date Series of Funds” has provided participants with a “hands off” approach to their retirement, while still maintaining a diversified investment portfolio. At a high level, a Target Date fund can be summed up as a mutual fund that will automatically reset its asset mix of stocks, bonds and cash equivalents (within its underlying mutual fund holdings), according to a set timeframe, usually the investor’s expected retirement date. The glidepath of the fund generally starts off aggressive in nature (i.e. a heavier weighting to equities) and scales back to a more conservative allocation (i.e. a heavier weighting to fixed income) as the investor nears retirement.

According to the Employee Benefit Research Institute, it is estimated that around 41% of 401(k) participants were invested in TDF’s at year-end 2012….a huge increase in comparison to the 5% invested at year-end 2006.

It is important to note that while Target Date funds, generally share the same philosophical approach, they often differ on their “tactical approach”. Examples of this can be seen with TDF’s designed to take you to retirement and other TDF’s that are designed to take you through retirement. Because of these inherent differences, plan sponsors should be sure and do the due diligence on the TDF series that they plan on implementing.

All granular details aside, the research shows that retirement plan participants are looking for investment options that provide diversification and convenience. If you feel like you or the vast number of employees within your company are “do it for me” type investors…..it may be a great time to discuss these options in greater detail with your plan’s financial advisor!

Author: Ken Dawson

Investment & Retirement Service Coordinator

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