Should you really have your entire 401(k) in a target-date fund?
If you’re looking to give your 401(k) a boost, a target-date fund may be an option worth looking into. In a 3rd quarter analysis of their investors’ savings, Fidelity Investments found that more than half of their 401(k) account holders have their assets in target-date funds.
What is a target-date fund?
A target-date fund is also known as a lifecycle or age-based fund. The collective investment plan usually comes in the form of a collective trust or mutual fund. A fund manager will change the stocks and bonds in your portfolio every year. As you near your target retirement date, your investments become more conservative.
After your initial investment, you can let it earn interest and it will realign itself with your age as you get closer to your retirement age. Depending on your age, the target date will vary.
Who is the ideal candidate for the fund
If you’re new to the working world and are just starting out with investments, this may be the best time to start contributing to a target-date fund. Target-date funds treat everyone the same. You have the same risk if you’re making $20,000 a year as someone who makes $200,000 a year.
As you near retirement, the fund will adjust your equity. When you’re in your 20s, you’ll be more invested in equities while an older investor will have more money in bonds and conservative investments.
Know the risks
Employers often use a target-date fund as the default fund for employees investing in a 401(k) account. According to Fidelity Investments, 98% of employers are using target-date funds as their default retirement plan. This may or may not be the best option for everyone.
Although allocations of your assets may be customized for your target retirement age, they don’t take in to account how much money you’re investing. Something to consider if you’re older, investing more money and looking for quicker returns, you’re treated the same as a 20-year old with very little investments.