Most retirement plans offer employees a large menu of investment options. With so many choices, it is not necessarily easier for employees. Today, most plans offer some sort of risk- based and/or target date asset allocation fund option. These funds are typically viewed as appropriate for most long-term investors saving for retirement.
At the Raskin Planning Group, we think this is a good development, as long as participants choose appropriate funds that will help them meet their personal financial and retirement objectives. Unfortunately, we find this isn’t always the case.
What is a risk-based or target date asset allocation fund (RBF or TDF)?
These are typically mutual funds or collective investment trusts that give participants broad exposure to a variety of asset classes, primarily in U.S. and non-U.S. stocks and bonds. In theory, they are well diversified and offer participants a reasonable long-term investment experience. That doesn’t mean they will always have great performance. In general, they have tracked the markets. These funds historically have gone up and down when global stocks go up and down.
Investment companies build these portfolios based on their long-term view of capital markets. They aren’t trying to time the market and will stay fully-invested at all times. They decide the appropriate mix of stocks and bonds for each fund. For example, they might offer three RBFs, aggressive (80% in stocks), moderate (60% in stocks) and conservative (40% in stocks).
TDFs are designed to become more conservative as plan participants approach retirement. A young participant thirty years from retirement might be in a target date fund that is aggressively allocated (100% in stocks). As the investor becomes older and gets closer to retirement age, the fund will become more conservative, reducing stock and increasing bond exposure. At retirement age, the fund might be only 40% stocks and 60% bonds.
In our next article, we will continue to discuss RBF and TDF funds, specifically, their differences.
Contact us today with questions or comments.