Fund Commentary with Steve Schoepke
401k Plan Participant Concerns when choosing Target-Dated Funds
Well, maybe it was too good to be true. The target-dated concept was designed to provide 401k Plan Participants with an investment choice where only one question need be answered: When does a employee need the money they have been contributing to their 401k account?
That's a simple enough question to answer but in this case simple doesn't necessarily translate into a one-size-fits-all or an investment that's appropriate for every employee.
Keep this in mind: Plan Participants do not have to concern themselves with the complexities of allocating their contributions among different mutual funds or other plan investment choices.
So employees, as well as anyone else considering a Target-Dated Fund whether it be as a 401(k) choice or for another reason, should ask a number of questions about Target-Dated Funds BEFORE investing in them. Below are a few questions to ask:
- How is the fund managed?
- What holdings are in the fund's portfolio?
- What are the risks involved when investing in Target-Dated funds?
- What are the costs and fees to me specifically?
Once those questions are answered, investors and/or Plan Participants need to ask themselves if the fund's risk-profile matches their own tolerance for risk. Just because you and other investors need your money at the same target-date, doesn't necessarily mean that all of you are willing to take the same investment risk during that period.
Target-Dated Funds are facing lots of scrutiny these days. And like so many other investments that sound good and look great on paper they are not for everyone.
As was pointed out in earlier pieces on this subject, timing is everything. Like all investment products, long-term performance depends upon what's happened or is happening in the market.
In the next and last article in this series, I will describe a major risk inherent to target-dated, target risk, or simply investing in multiple-fund portfolios. This is the risk of fund exposure overlap, which was a major contributor to target-dated fund losses last year.
Steve A. Schoepke, Director of Research for Financial Research & Analysis Associates, a New York-based investment and mutual fund research firm.
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