The Pitfalls of Buying Target-Date Funds

The Pitfalls of Buying Target-Date Funds

What exactly is a “Target-date Fund”? Typically a fund that base its objectives on the age of the investor. The younger the investor the more focus on growth and less on income and asset protection. As the investor becomes older, the goals and objectives change to reflex the current age and the mix of assets change to provide more income and asset protection.

You will find more target-date funds in 401k plans than outside of company pension plans. It would seem that these funds are an ideal solution for companies looking for a turnkey solution rather than providing a well balance selection of investment choices.

The problem with the vast majority of company pension plans (401k) is the fact that companies offer very few investment options and those they do pick underperform the market as a whole.

One size fit all theory of investing is a major short-coming of target-date funds, longevity is likely to be the single largest factor that can wreck the plans of those designed target-date plans.

These funds do not take in consideration personal financial goals and financial resources that an investor can have or the likelihood they may well live past 100.

Each company pension plan may offer different investment options, so do review those options with a knowledgeable investment professional rather than relying solely on your company’s human resource department.

Once you reach retirement and left your employer, do by all means move your 401k into an IRA rollover at a low cost discount broker such as Fidelity Investments or Charles Schwab. Your investment choices will be much greater and long term your rate of return should also be greater though that will depend on your choices you do make.

Remember that once you do start withdrawing your pension, your income from those retirement plans will be treated as ordinary income subject to federal income taxes and possibly state depending in which state you live.

Daniel Iuculano, AAMS CMFC

Accredited Asset Management Specialist

Chartered Mutual Fund Counselor

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