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The August 3rd Wall Street Journal has an interesting article on target date funds in 401k plans. The article notes:
”Target-date funds are a professionally managed portfolio of stocks and bonds that recalibrates the mix as we hurtle toward retirement age. These funds now attract 64 cents of every dollar that flows into 401(k) plans, Vanguard Group data shows, and hold trillions in assets.”
The article says some people reject these funds as too conservative and sometimes too expensive. Investors feel they can do better with more in stock index funds.
When I managed 401k plans and seeing the investment choices many workers made, I thought target date funds made a lot of sense for most people.
On the other hand, many employees misused them by investing in the target fund and several other funds thus negating the purpose of the target fund.
Sometimes they are indeed too expensive. For example, Fidelity has a series of target index funds and a series of target active funds. To invest in the low-cost index funds where I worked, you had to open a separate BrokerageLink account. I’d guess the default (active) fund they put you into cost maybe 3x the annual expense ratio of the index fund.
I think for the average worker who does not even necessarily understand what they are invested in, target date funds or lifestyling are on balance a good thing.
Possibly more importantly employers and providers obviously think they are because they presumably reduce the risk of being sued or pension pots evaporating on the eve of retirement.
Obviously for those prepared to get educated there can be room for improvement not least in base assumptions about retirement date and an often foundational assumption that the retiree needs to be more risk free at that date because they’ll be buying an annuity.
What about the next 30 years and the spectre of inflation or unforeseen future costs? I can see arguments that there is not just one target date but at least 2. The first is at traditional retirement where the ADD phase ends, but the second is at a future date where the second GROW CAUTIOUSLY phase ends and switches to SECURITY AND SIMPLICITY.
Some target funds offer a retired mode to consider what you mention so it’s possible to pick a date and then switch to the retirement income fund.
I’m not sure that’s quite the same thing. Taking the plain English to me a retirement income fund implies a focus on annual cashflow via dividends and interest rather than continuing growth.