 |
| |
 |
| |
 |
| |
 |
| |
 |
Target-Dates Funds: Proceed with Caution.
By: Bryon E. Townsend, CFP®
Over the past few years, mutual fund companies have flooded 401k Plans with Target-Date funds in
an attempt to make portfolio selection easier for participants. They want to provide an “easier” option
to retirement savings. For those that aren’t familiar with these investments, they are mutual funds
designed to provide an “appropriate” asset allocation based on the date at which you expect to need
access to your money. i.e. the day you retire.
The more time that you have, the more aggressive these funds invest. Over time, however, they’re
designed to automatically move to a more conservative allocation. Thus, they’re a very convenient
“set and forget” solution. That being said, you need to be careful.
There are two potential concerns with using these portfolios for your retirement dollars. The first
issue you need to review is the fund expenses. By this, I mean consider all of the expenses. With a
few exceptions, many mutual fund companies use this new fad as an excuse to double dip on fees.
These target date funds are a variation of what is referred to as Fund of funds, meaning that they buy
other mutual funds. For example, John Hancock Lifecycle 2045 (JLJAX) will invest in other John
Hancock funds making up its investment allocation. On the surface there is no problem, however,
when you flip through the prospectus you realize they charge you 1.43% in net fund fees annually and
the average of the underlying mutual funds is 0.80%. That means they charge you 0.63% more per
year for doing something the 401k plan advisor is getting paid to perform. Many plan advisors
specifically include these funds in an effort to check the box on meeting new regulatory requirements
and lighten their work load, in a lot of cases in to your detriment.
The second issue to be concerned with is the actual asset allocation itself. Target-date funds make
the assumption that the only factor in determining the proper investment mix is time. Simply looking
at time horizon could cause some to invest either more aggressively than they are comfortable with
or too conservatively to meet their objective. Factors such as an individual’s comfort with the stock
market’s ups and downs is probably more important than time. Often more conservative investors
are willing to save a little more if they don’t have to take as much risk. Another downside to investing
too aggressively is that when people get anxious about their savings (i.e. after a drop in value), there
could be a natural tendency to stop saving or to move everything to a preservation (or cash) option,
which could cause them to lose any possibility of reasonable performance.
Unfortunately, there is no short cut to retirement savings without trade-offs. The bottom line is you
will be happier and more likely to meet your goals if you have an asset allocation that is designed for
your overall needs. Many 401k investors have taken advantage of the growing number of fee
Advisors that develop, review and adjust your 401k options for a small charge. It gives investors the
comfort of knowing that their plan is as personalized as possible by a qualified person and that there
are no conflicts of interest. That might be a better use of your money.
Bryon Townsend is a Certified Financial Planner and Managing Director of the Houston based
retirement planning firm W.R. Anderson & Co., LLC and offers securities through NEXT Financial
Group, Inc. member FINRA/SIPC.
By: Bryon E. Townsend, CFP®
Over the past few years, mutual fund companies have flooded 401k Plans with Target-Date funds in
an attempt to make portfolio selection easier for participants. They want to provide an “easier” option
to retirement savings. For those that aren’t familiar with these investments, they are mutual funds
designed to provide an “appropriate” asset allocation based on the date at which you expect to need
access to your money. i.e. the day you retire.
The more time that you have, the more aggressive these funds invest. Over time, however, they’re
designed to automatically move to a more conservative allocation. Thus, they’re a very convenient
“set and forget” solution. That being said, you need to be careful.
There are two potential concerns with using these portfolios for your retirement dollars. The first
issue you need to review is the fund expenses. By this, I mean consider all of the expenses. With a
few exceptions, many mutual fund companies use this new fad as an excuse to double dip on fees.
These target date funds are a variation of what is referred to as Fund of funds, meaning that they buy
other mutual funds. For example, John Hancock Lifecycle 2045 (JLJAX) will invest in other John
Hancock funds making up its investment allocation. On the surface there is no problem, however,
when you flip through the prospectus you realize they charge you 1.43% in net fund fees annually and
the average of the underlying mutual funds is 0.80%. That means they charge you 0.63% more per
year for doing something the 401k plan advisor is getting paid to perform. Many plan advisors
specifically include these funds in an effort to check the box on meeting new regulatory requirements
and lighten their work load, in a lot of cases in to your detriment.
The second issue to be concerned with is the actual asset allocation itself. Target-date funds make
the assumption that the only factor in determining the proper investment mix is time. Simply looking
at time horizon could cause some to invest either more aggressively than they are comfortable with
or too conservatively to meet their objective. Factors such as an individual’s comfort with the stock
market’s ups and downs is probably more important than time. Often more conservative investors
are willing to save a little more if they don’t have to take as much risk. Another downside to investing
too aggressively is that when people get anxious about their savings (i.e. after a drop in value), there
could be a natural tendency to stop saving or to move everything to a preservation (or cash) option,
which could cause them to lose any possibility of reasonable performance.
Unfortunately, there is no short cut to retirement savings without trade-offs. The bottom line is you
will be happier and more likely to meet your goals if you have an asset allocation that is designed for
your overall needs. Many 401k investors have taken advantage of the growing number of fee
Advisors that develop, review and adjust your 401k options for a small charge. It gives investors the
comfort of knowing that their plan is as personalized as possible by a qualified person and that there
are no conflicts of interest. That might be a better use of your money.
Bryon Townsend is a Certified Financial Planner and Managing Director of the Houston based
retirement planning firm W.R. Anderson & Co., LLC and offers securities through NEXT Financial
Group, Inc. member FINRA/SIPC.
| Ask An Expert Ask any question you would like an answer to we try our best to get you a complete and detailed answer. |