It’s essential for investors to make a knowledgeable decision about investing their 401(k) money in a target-date fund or in other options. Retirement-plan investors frequently aren’t sure how to distribute the money they’re putting away. So the growth of target-date funds, which automatically shift investors’ money from stocks to fixed income gradually over the years, has been widely seen as a success for the country’s retirement readiness. Experts worry that some investors who don’t fully understand these funds might take on more risk than they want. Target-date approach surprised many investors with a decline in their funds during the 2008 financial crisis.
“That experience should have served as a wake-up call for investors and the relentless growth in target-date funds is troubling because studies have shown that investors and industry professionals alike do not fully appreciate the risk these funds present,” Luis A. Aguilar, SEC member. Investors should be aware that target-date funds can have confusing names and large fees.
To evaluate a target-date fund, check the prospectus to determine the glide path, the changes in allocations over time, to make sure the fund is taking an amount of risk over the years that the investor is comfortable with. Typically, 401(k) plans offer a series of target-date funds from the same fund company, so investors who can’t find one with low fees and their preferred risk profile might prefer to do things the traditional way, to invest in the stock and bond funds their plan offers and commit to doing the rebalancing in the years ahead themselves.