Some investors may benefit from target-date retirement mutual funds, but only if they are used correctly. These managed funds have complete control over asset allocation in order to meet the fund's stated goal by the deadline. Investors can invest in a variety of mutual funds, stocks, closed-end funds, and exchange-traded funds to manage their retirement funds (ETFs). However, they may be unsure which product is best for them to use to achieve their retirement goals. Target-date mutual funds were created to help simplify your life by assisting you in making these investment decisions. These funds, however, may not be the best option for all investors.
Main Points
- As you get closer to the date you choose for retirement or another milestone, a target-date fund's asset allocation becomes more conservative.
- Many investors choose target-date funds voluntarily because they are the default option in 401(k) plans with automatic enrollment.
- Low minimum investment amounts, professionally managed portfolios, and low investor maintenance are all benefits of target-date funds.
- The lack of diversification, higher expense ratios, and a one-size-fits-all approach are all disadvantages.
Target-Date Funds: What Are They?
Many people think of target-date funds as "set it and forget it" investments. If you plan to retire in 20 years, you might invest in a target-date fund with a 20-year horizon. As you get closer to retirement, the fund shifts its investments away from riskier mutual funds and toward more conservative mutual funds (holding bonds and cash) (holding equities). According to the theory, set the investment in the fund and forget it, and the fund will take care of everything. The glide path of a target-date fund is the reallocation of assets over a predetermined period to reflect changes in investors' risk tolerance. The glide path determines the fund's asset allocation over time, shifting from more aggressive investments early in the fund's life to more conservative investments as the fund matures and investors near their target goal.In retirement plans, target-date funds
According to a Deloitte study published in 2019, target-date funds were available in 43% of defined contribution plans (such as 401ks). The Pension Protection Act, which President Bush signed in 2006, is credited with maintaining the popularity of target-date funds. Target-date funds were made the default option in 401(k) plans with automatic enrollment as a result of the Act. To put it another way, some employees have been automatically enrolled in their 401(k) plans, and their contributions have been invested in a target-date fund, whether they like it or not.The Benefits of Target-Date Funds
If you're short on time or don't want to deal with making ongoing investment decisions, target-date funds can help. Some of the advantages of target-date funds are as follows:- Low minimum investment amounts allow for immediate diversification across asset classes (equities, bonds, etc.)
- Portfolios that are professionally managed and offer a hassle-free investment
- Because the funds are designed to be a one-size-fits-all solution, they require little maintenance.
Disadvantages
While target-date funds have their benefits, investors should be aware of the risks. Consider the following points:- Is it true that one size fits all? A good investment mix for one person may not be suitable for another.
- Higher expense ratios: Some target-date funds charge a fee for the underlying mutual funds and a fee for the management of the funds.
- Lack of diversification: If a target-date fund only invests in funds from one fund family (Fidelity, Vanguard, etc. ), the underlying mutual funds may have a similar investment style.
The Following Steps in Choosing One
If the idea of simple and disciplined investing via target-date funds appeals to you, the next step is to research your options. There are numerous target-date funds available. T. Rowe Price, Vanguard, and Fidelity are just a few low-cost providers offering target-date funds.