Target Date Funds: The Essential Guide
Because not all target date funds are created equal...
If there is one thing that's clear from recent history, it's that not all target date funds are created equal. But that's good. It means you have choices - provided you understand the differences so that you can choose the target date fund that is aligned with your goals.
But how do you start? We believe there are four core components of a target date fund that you need to understand before you make your selection. After all, the fund you choose can make a big difference to your participants.
Define your objective explicitly. If your goal is to help your participants preserve their accumulated savings, then you probably want less risk exposure (especially nearing retirement) than if your goal is to help them maximize every dollar invested. Keep in mind, the principal value is not guaranteed at any time, including the target date.
Determining your objective
Imagine a 45-year old employee. She's in mid-career and has her 401(k) assets in a 2035 target date fund. Now imagine explaining to her what she should expect from her 401(k) as the calendar zeros in on her target year.
Do you expect her to be more concerned with protecting what she's earned over the decades, or will she be focused on maximizing her savings through investing? Your vision for her needs to be captured in your target date fund's objective.
We often think of investment objectives in terms of economic forecasts, market access or risk, but for participants it is a personal and emotional decision. The way you define your target date fund's objective will have a major impact on everything from how participants spend in retirement to the anxiety level they feel as their retirement approaches.