Every 401(k) plan I review for my individual 401(k) advice clients includes a target-date mutual fund. Some 401(k) plans have been overrun by target-date mutual funds.
So, target-date mutual funds are popular. At least with the retirement plan consultants who sold your company on their 401(k) options. But does that mean a target-date mutual fund is a good choice for your 401(k) account?
Let’s start at the beginning. You will be able to identify my bias near the end of this article.
What is a target-date fund?
A target-date fund is a diversified mutual fund. Invested in a broad mix of stocks and bonds. Many target-date funds are “a fund of funds.” Target-date mutual fund own weighted investments in other mutual funds. Managed by the same mutual fund company.
Depending on the study you read, I have seen 401(k) target-date mutual fund usage rates of over 80%. No wonder target-date mutual funds are often the default option in large company 401(k) plans.
Popularity comes at a high cost
No wonder the target-date mutual fund “set-it-and-forget-it” investment management strategy is so popular. Who wants to fool around trying to figure out the best 401(k) mutual funds to own?
In my experience, plenty of individual 401(k) participants. The ones who care about annual costs. Investment performance. And the preservation of their 401(k) principal over the last couple of years.
I am spoiled. The majority of my 401(k) advice clients have high six-figure 401(k) account balances. Their 401(k) is a large part of their retirement nest egg.
My 401(k) advice clients want a more customized 401(k) investment management strategy. The opposite of the mass-market “off the shelf” concept of a target-date mutual fund.
I don’t have any idea what the menu of mutual fund options is in your company 401(k). But I am willing to guess you have cheaper and better mutual funds available to you. Right now.
SDBA to the rescue!
A SDBA (self-directed brokerage account) option solves every 401(k) mutual fund problem. You don’t have to mess around with a target-date mutual fund.
You can forget about all the expensive and underperforming mutual funds. The majority of your default 401(k) menu. Target-date or regular mutual funds.
A self-directed brokerage account expands your 401(k) menu of investment options. Most offer lower annual expenses. And better investment performance. Than any target-date mutual fund available to you now.
With an SDBA, your 401(k) can provide access to a fiduciary investment advisor. Who can help improve your long-term 401(k) investment management decisions.
Never assume the self-directed brokerage account is the best 401(k) option for you. But take the time to find out.
Call your Human Resources or Employees Benefits people. Or your company 401(k) provider. Find out if you have a self-directed brokerage account option. And how much it costs to have one. Ask about the annual costs and the costs of trading.
I have spent the last several years trying to figure out the best way to share my 401(k) advice content. I have tried Twitter, Facebook, company web site, and LinkedIn Groups. I now realize nothing beats a well-crafted newsletter delivered to your inbox once a week. Sign-up here.
Do you have the SDBA 401(k) account option? If so, comment below. Let’s start a conversation. This account might improve your 401(k) investment results.
