Are Target Date Funds Right for Your Participants?
PUTTING PEOPLE FIRST
In recent years, plan sponsors have increased the inclusion of Target Date Retirement funds in their investment fund lineup. In fact, J.P. Morgan estimates that 88% of new retirement plan contributions are expected to flow into Target Date Funds by end of this year1. Here are some of the reasons these types of investments have become so popular:
Many investors are unsure about where to start investing when it comes to selecting their allocation. They are faced with questions like “What mix of stocks and bonds should I be invested in?” Target Date funds help participants reduce the stress of having to make choices when creating this mix within their retirement plan lineup. Of course, even one’s decision to use Target Date funds should be re-evaluated regularly to ensure the investment accommodates an individual’s changing needs.
The answer is not always simple as to whether you should invest your contributions into a Target Date Retirement Fund, but for many retirement plan investors, Target Date Retirement Funds are the most prudent solution. The reason is that most participants don’t have the will, skill, or time to track and rebalance their own allocations.
Target Date Retirement Funds use a glide path2, or the shift of assets across the entire investment time horizon, to control how much investment risk the funds are exposed to. The fund’s time horizon3, or the length of time until an investment reaches the date in the fund name, dictates where the fund’s allocation will fall along the glide path. As the fund’s time horizon becomes shorter (e.g. Target Date 2020), the fund allocation will become more conservative. The reason for the lower risk exposure over time is to protect participant’s investments from stock market drops as they near retirement.
Along with the automatic risk adjustments, other advantages Target Date funds offer include regular rebalancing and professional monitoring of investments. A portfolio manager of a Target Date fund will track the underlying investments to ensure the fund maintains a proper risk exposure and stays along it’s marketed glide path. If certain investments within the fund perform erratically or the fund becomes “out of balance,” the portfolio manager will rebalance the allocation to match the proper risk exposure.
Investment Fiduciaries, LLC is a Registered Investment Advisory firm that specializes in retirement plan consulting. Our talented team of professionals work closely with plan sponsors to secure the right offerings for your organization and employees. We also offer education to participants on allocation and savings strategies. Contact Innovative to see if Target Date Retirement Funds are right for your plan.
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