For a lot of investors, the 401(k) is the main savings vehicle for accumulating wealth. 401(k) plans often provide matching contributions which helps you to save more each year, and reach your retirement goals quicker. The downside (in my mind) of some 401(k) plans is that you have limited investment options. It may be difficult for the investor (or even a professional advisor) to create the exact portfolio that is needed/wanted. This is because 401(k) plans often only have between 10-30 investment options. Often, 401(k) plans offer “Target Retirement” funds. These funds have some great advantages:
- Target funds usually own small, medium, and large companies
- Target funds usually own value and growth companies
- They usually have a good mix of US and International stocks
- Target funds systematically reduce risk (add more bonds) as the investor approaches the target retirement date
However, there are some drawbacks to these funds which include:
- No ability to customize the portfolio
- The target funds assume investors are on a “glide path” toward retirement; meaning, the target funds start adding bonds each year even if the investor isn’t ready to add bonds to their portfolio (i.e. some investors are “behind” and still need to take a higher degree of risk and target a higher return).
In summary, target retirement funds can be a great choice. I believe they are not appropriate for everyone. When you get new options in your 401(k) plan, the best strategy is to reach out to your advisor to make sure your retirement plan is invested correctly for your goals, time horizon, and risk tolerance.