Target funds
Throughout the last few years I’ve watched target funds go from just a select few to huge funds encompassing billions of dollars. They’re the bulk of 401k plans, and they seem easy to master. Just pick a date you want to retire, add funds to your target fund and expect that by the date you wish to retire, your target fund will have enough money.
Target funds are usually sold in 5 year increments. The funds reallocate your investment every year as you near retirement to safer investments in bonds and treasuries and out of stocks. One myth is that picking a closer target date will bring you higher returns. This is completely untrue, target funds are made to produce lower returns closer to retirement age.
For one stop investing, target funds may have their place in some 401K plans. This convenience of picking a target date to retire, setting your investment and forgetting it for 40 years may have its perks but you’ll pay for it in fees and limited returns. These funds are usually built to piggyback other funds or redistribute your investment into other mutual funds. Because these funds “outsource” their investing, they usually come with high load fees and certainly higher than average yearly assessment fees.
Target date funds are very easy investments but generally mirror the returns of the overall market. I would suggest to allocate your investment dollars by yourself. Through a mix of index funds and a few corporate bond funds an investor could easily beat the returns of target funds while lowering fees.
Its hard to avoid this new breed of fund as some new retirement plans only offer Target date funds as their only option. I always suggest for the experienced investor to put their investment in the highest date Target fund to keep exposure to the markets high in order to cover the added fees of a target fund. Beware, some of these funds have fees topping 2% per year, which can do sizable damage on a portfolio.
