Today I was reading an article about 5 Things you may not know about your 401(k) plan. In the article, the 3rd issue listed was ‘Target-date funds aren’t always on target’
I was just talking with a client about #3 : “Target date funds aren’t always on target’ the last week.
Posted by Stalwart Financial Planning on Thursday, March 24, 2016
I point out this article because I was just telling a new client this same thing the other week. They had gotten started with their 401K and just went with the default investments (a target date fund based on their age). During a recent market downturn, they became alarmed by how much their portfolio had loss, thus the reason they came to see me. After some review of their risk tolerance, it became apparent why they became so alarmed during the recent decline in the stock market. As they had aged and started thinking more about their retirement, the target date fund really did not match their personal risk tolerance.
You might be asking how did this happen. Well, the target date fund is matching a risk tolerance for what they have determined is the average person invested in the fund. In many cases, this will not match your risk tolerance. By stopping by to see me, I was able to create a portfolio using the investment options available in their 401K that more closely matched their risk tolerance. As this client gets closer to retirement, together we can make changes to his 401K investments so they will continue to make his risk tolerance and financial goals.
Target date funds are not all bad
The idea behind this is a good one:
- When younger investments are more aggressive
- As you get closer to retirement investments become more conservative
- Automatic rebalancing
This is good because most new clients that walk through my door are too conservative (mostly stable value investments) or too aggressive (100% equity investments). Also, many do-it-yourselfers are reluctant to rebalance when markets are going up. I think for people who are not into getting into the details of investing and do not want to get help from a financial professional, then target date funds are a good option for them.
Do your 401K investments match your risk tolerance and financial goal needs?
Author
Isaac is a Fee-Only (no products sold) Certified Financial Planner® Practitioner. Isaac founded Stalwart Financial Planning with offices in Fayetteville NC and Durham NC. Isaac provides comprehensive planning and investment management services to individuals from all walks of life. Isaac can be reached by phone at 910-867-8464, or by email (iallen@StalwartPlanning.com). Visit him at Stawart Financial Planning www.StalwartPlanning.com.