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Target-Date Fund Basics

Target-Date Fund Basics

Hey, it's Mike Sayre with CUI Wealth Management. Let's talk about target-date funds. If you're involved in managing your company's 401k plan, you've probably heard of or may even be using target-date funds. They're very popular and very common to have in a 401k plan. There are a couple of reasons for that. One of them is that they can meet the requirements for what's called a Qualified Default Investment Alternative or QDIA. So, if that's important to you in your plan design, then a target-date fund can be something that you can use for that.

The way that a target-date funds work, if you're not familiar with them, is it has a specific target for retirement. We'll say target 2055, target 2060, or target 2025. It's assuming that is when that participant is going to retire. It'll be based on the age of the participant and the age they'll be retiring. It will automatically rebalance to become more and more conservative as that participant gets closer to retirement. How quickly that participant's balance starts going from more aggressive to less aggressive is called the glide path. Some funds are more aggressive in how their glide path is put together.
I bring this up because this is one of those things you want to pay attention to in reviewing your 401(k). If you have a target-date fund as a QDIA in your retirement plan, most people will stay in that target-date fund. Most people are going to go into it as a default and they're not going to change. Now, not everybody's going to be that way. But, since the majority will be in there, you want to make sure that you've taken a look at those target-date funds.

It's common for recordkeepers to give a price break if you use their specific target-date funds. That's not necessarily a bad thing to do, but you want to make sure that that's not the only reason for the decision of using that target-date fund. You want to make sure there are some really solid reasons for it. For example, it's cost-effective and meets the needs of the demographics of your employees. Because once again, most people are going to stay in those funds. It's essential to pay close attention to the due diligence put into that type of fund selection. Once again, Michael Sayre with CUI Wealth Management- your 401k advisor.

Disclosures

Mutual funds are sold by prospectus only. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund. The fund prospectus provides this and other important information. Please contact your representative or the Company to obtain a prospectus. Please read the prospectus carefully before investing or sending money.

There are some specific traits of target date funds that you need to be aware of.  Target-date funds are not guaranteed against losses. Funds with similar target dates can transition to more conservative investments in different ways and at different times. Combining target-date funds with other investments affects your overall asset allocation. Reaching the target date does not mean you’ve saved enough to meet your goal. Pick your target date carefully. Assess how much risk you are willing to take. Determine whether the fund will take you to or through retirement. Monitor the glide path of your target-date fund. Pay attention if automatically enrolled. Keep your "mixed" investments balanced.

Investing involves risk.  Loss, including loss of principal may occur. No investment strategy can guarantee positive results, nor can it protect against loss in periods of declining markets. Past performance does not guarantee future results.

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