Do you really know your 401(k) target date mutual fund?


Target date mutual funds have taken over company 401(k) retirement plans. These funds are growing faster than summer weeds in a back yard.

Target date mutual funds change their mixture of stocks and bonds as the “target date” of the individual company 401(k) retirement plan participant gets closer. They usually have a future date in the title of the mutual fund.

This mutual fund investment strategy sounds like a great idea. What could be simpler than owning a mutual fund that manages itself the closer you get towards retirement?

The marketing strategy behinds target date mutual funds is that they are a “set-it-and-forget-it” investment management solution. What other parts of your life can you set and forget about for years at a time?

All things too-good-to-be-true in the investment world are just that…too-good-to-be- true. Add company 401(k) target date mutual funds to that list.

The majority of individual company 401(k) retirement plan participants that I meet with have no idea what percentage of stocks and bonds that they own a target date mutual fund. The stock and bond allocations are different for each target date mutual fund.

Much of the confusion over target date mutual funds goes all the way back to the Pension Protection Act of 2006. That piece of legislation allowed company retirement plan sponsors to automatically enroll individual company 401(k) retirement plan participants.

The company 401(k) retirement plan menu of choice for automatic enrollment became target date mutual funds for most company retirement plans.

Target date funds suffered significant losses in the last great stock market decline of 2008 to 2009. Many of these mutual funds dropped between 25% to 45%in value.

The mutual fund companies who sell Modern Portfolio Theory along with those fancy pie charts want you to not to worry about short-term stock market losses.

If you recently finished college and are a beginning company 401(k) retirement plan investor, a target date mutual fund is a good place to start. The majority of individual company 401(k) retirement plan participants don’t fall into that category.

My company 401(k) retirement plan advice clients can’t afford to lose up to 0ne-half of the value of their retirement savings. They don’t have another 20 years to make those stock and bond market losses back.

Please make sure that you know exactly what kind of target date mutual fund you own now in your company 401(k) retirement plan account. There is no guarantee that those mutual funds will protect their company 401(k) retirement plan account principal from the next great stock market loss.

Interest rates are at all-time lows. When interest rates rise, bond prices fall. U.S. stocks are close to all-time highs. Every investor knows how fast the stock market can fall.

Ric Lager
Lager & Company, Inc.

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