Objective information about financial planning, investments, and retirement plans

Target Date Funds: Does the Glide Path Matter?

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Most Target Date Funds are funds of the mutual funds of the fund family offering the TDF.  The pitch is to invest in the fund with a target date closest to your projected retirement date and “… we’ll do the rest….”  A key element of Target Date Funds is their Glide Path into retirement.  Stated another way the Glide Path is the gradual decline in the allocation to equities into and during retirement.  Should the fund’s Glide Path matter to you as an investor?

Glide PathTarget Date Funds have become a big part of the 401(k) landscape with many plans offering TDFs as an option for participants who don’t want to make their own investment choices.  Target Date Funds have also grown in popularity since the Pension Protection Act of 2006 included TDFs as a safe harbor option for plan sponsors to use for participants who do not make an investment election for their salary deferrals and/or any company match.

These funds are big business for the likes of Vanguard, Fidelity, and T. Rowe Price who control somewhere around 70% of the assets in these funds.  Major fund families such as Blackrock, JP Morgan Funds, and the American Funds also offer a full menu of these funds.  Ideally for the fund company you will leave you money in a TDF with them when you retire or leave your employer, either in the plan or via a rollover to an IRA.

What is a Glide Path?

The allocation of the fund to equities will gradually decrease over time.  For example Vanguard’s 2060 Target Date Fund had an equity allocation of almost 88% at the end of 2013.  By contrast the 2015 fund had an equity allocation of approximately 52%.

This gradual decrease continues through retirement for many TDF families including the “Big 3” until the equity allocation levels out conceivably until the shareholder’s death.  T. Rowe Price has traditionally had one of the longest Glide Paths with equities not leveling out until the investor is past 80.  The Fidelity and Vanguard funds level out earlier, though past age 65.

There are some TDF families where the glide path levels out at retirement and there is some debate in the industry whether “To” or “Through” retirement is the better strategy for a fund’s Glide Path.

Should you care about the Glide Path? 

The fund families offering Target Date Funds put a lot of research into their Glide Paths and make it a selling point for the funds.  The slope of the Glide Path influences the asset allocation throughout the target date years of an investor’s retirement accumulation years.  The real issue is whether the post-retirement Glide Path is right for you as an investor.

On the one hand if you might be inclined to use your Target Date Fund as an investment vehicle into retirement, as the mutual fund companies hope, then this is a critical issue for you.

On the other hand if you would be inclined to roll your 401(k) account over to either an IRA or a new employer’s retirement plan upon leaving your company then the Glide Path really doesn’t make a whole lot of difference to you as an investor in my opinion.

In either case investing in a Target Date Fund whether you are a 401(k) participant saving for retirement or a retiree is the ultimate “one size fits all” investment.  In the case of the Glide Path this is completely true.  If you feel that the Glide Path of a given Target Date Fund is in synch with your investment needs and risk tolerance into retirement then it might be the way to go for you.

Conversely many people have a number of investment accounts and vehicles as they head into retirement.  Besides their 401(k) there might be a spouse’s 401(k), other retirement accounts including IRAs, taxable investments, annuities, an interest in a business, real estate, and others.

In short, Target Date Funds are a growing part of the 401(k) landscape and I’m guessing a profitable way for mutual fund companies to gather assets.  They also represent a potentially sound alternative for investors looking for a professionally managed investment vehicle.  The Glide Path is a key element in the efforts to keep these investors in the Target Date Fund potentially for life.  Before going this route make sure you understand how the TDF invests, the length and slope of the Glide Path, the fund’s underlying expenses, and overall how the fund’s investments fit with everything else you may doing to plan for and manage a comfortable retirement.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss your 401(k) plan and all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

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Five 401(k) Investing Tips for This or Any Market

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Benjamin GrahamThe Dow Jones Industrial Average has hit something like 30 new highs this year alone, the S&P 500 is near record levels as well.  Twitter just went public and Obama Care will go into full swing in 2014.  What does any of this mean to you as a 401(k) investor?  Here are five 401(k) investing tips for this or any market environment.

Rebalance your account 

If you’ve let your holdings run it’s quite likely that your account is over allocated to equities given the strong showing the stock market has made so far in 2013.  This would be a good time to look to rebalance your account back to the original allocations that you had intended.  Paring back on stock funds might seem counterintuitive, but essentially you are taking some of your gains off of the table in order to keep the risk associated with your overall portfolio in line.

Consolidate and coordinate 

If you are just starting out in the workforce, it’s likely that your 401(k) is your lone investment vehicle.  By the time you get to your 30s or 40s and beyond it’s likely that you’ve switched jobs several times and have left a number of old 401(k) accounts or IRAs in your wake.  If you are married and both working multiply this financial clutter by two.

Consider consolidating your old 401(k) accounts either in a rollover IRA or into your current employer’s 401(k).  Looking after a number of scattered accounts is counterproductive and makes viewing all of your investment holdings as a consolidated portfolio that much harder.

While we are on the subject, ALWAYS view your 401(k) account as a part of an overall consolidated portfolio.  I create a spreadsheet for each client to do just that, with all of the technology available today this is not difficult, but it may take just a bit of time to lay things out the first time you do it.

The reason for this approach is so that you view your overall asset allocation and the diversification of your portfolio across all investment and retirement accounts.  Are you taking too much risk or not enough?  Do you own the same fund in three accounts all in different share classes?

Increase your salary deferral

This is the time of year where many companies have their employees go through Open Enrollment for their employee benefits.  While you are thinking in terms of benefits this is a good time to boost your salary deferral to ensure that you are contributing the maximum to the plan.  If you can afford it and are not on track to max out for 2013 ($17,500 and $23,500 if you are 50 or over) arrange to have more withheld for the rest of this year and figure out what percentage to apply to your first check in 2014.  How you invest your 401(k) is important, but studies have shown that the amount you save for retirement is the biggest single factor in determining the size of your nest egg.

Don’t default to the Target Date Fund

One of the Target Date Funds offered by your plan might be the right choice for you.  This may be the fund with the target date closest to your anticipated retirement date or some other fund in the series.  It is important that you understand what is under the hood of the Target Date Funds and decide if this is the right approach for you.  Note these funds change from time-to-time as witnessed by some recently announced changes that Fidelity will be making in its Freedom Funds. 

Get the help you need 

Many plan sponsors are offering advice options ranging from online advice to one-on-one advice to managed accounts.  Check out these options and any fees associated with them.  If you work with a financial advisor make sure that they are providing you advice on how to allocate your 401(k) account along with the advice they provide on your other holdings.  Some 401(k) participants are savvy investors, others are not.  If you are in this latter camp, bite the bullet and hire the advice that you need.  This is important, it’s your retirement, and you only have one shot at it.

For better or worse the 401(k) and similar retirement plans are the main source of retirement savings for most of us.  Make the most of your plan regardless of what is going on in the markets or the economy.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss your 401(k) plan and all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

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4 Steps to Make Your 401(k) Work as Hard as You Do

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WI: Eau Claire Labor Day celebration, Septembe...

Labor Day is here once again.  A time for picnics and the start of the college football season.  It’s also a good time to step back and make sure that you are on track for retirement.  Whether you work as an employee or you are self-employed you work hard for your money.  In spite of what was said on PBS Frontline The Retirement Gamble and elsewhere in the press, in my opinion 401(k) plans are one of the best retirement savings vehicles available.  Here are 4 steps to make sure that your 401(k) plan is working hard for your retirement.

Get started 

This might seem basic, but you can’t benefit from your employer’s 401(k) plan unless you are participating.  If you haven’t started deferring a portion of your salary into the plan this is great time to start.  Look at your budget, determine how much you can afford to defer each pay period and get started.  You may be able to do everything online, otherwise contact the plan administrator at your company.

Are you self-employed?  There are a number of retirement plan options to consider including a Solo 401(k).  If you don’t have a retirement plan in place for yourself, do this today.  You work way too hard not to be putting something away for retirement.

Increase your contributions 

This is a great time to review the amount of your salary deferral and look to increase it if you are not already maxing out your contributions.  For 2013 the maximum contribution is $17,500 if you are under 50 and $23,000 if are 50 or over (and if you turn 50 before the end of the year).  For those 50 and over you can still make the full $5,500 catch-up contribution even if your contributions are otherwise limited to an amount below the maximum due to your plan failing its testing.  This situation can occur for highly compensated employees and usually occurs at smaller plans.

If you were enrolled into your employer’s plan under an automatic enrollment scenario the amount you are deferring is likely inadequate to meet your retirement needs, you need to revisit this and take affirmative action both in terms of the amount deferred and the investment options to which those salary deferrals are directed.

It’s often popular to urge 401(k) participants to contribute at least enough to receive the full amount of any company match.  I agree that it makes sense to go for the full match, but the key words here are at least.  The quality of each plan is different, but if your plan offers a solid investment menu and reasonable expenses I suggest that you consider increasing your contributions beyond the minimum required to receive the full company match.  Automatic salary deferrals are an easy, painless way to invest and simplicity in saving for your retirement should not be pooh-poohed.

Take charge of your investments, don’t just default 

Target Date Funds are offered by many 401(k) plans and are often the default option for those participants who do not make an investment election.  While TDFs may be fine for younger participants, I’m not a huge fan for those of you within say 15-20 years of retirement.  If you are in this situation I urge you to look at an allocation that is more tailored to your overall situation.  At the very least if you are going to use the Target Date Fund option offered by your plan take a hard look at how the fund will invest your money, how this fits with investments you may have outside of the plan, and the fund’s expenses.

Plan for your retirement 

While contributing to your 401(k) plan is a great step, it is just that, a step.  The retirement savings crisis facing many workers here in the U.S. has been well-documented.  Your 401(k) is an important tool in planning for retirement, but the keyword is planning.  Many 401(k) plan providers offer retirement planning tools on their websites.  They may also offer advice in some format.  Consider taking advantage.

If you work with a financial advisor make sure that they consider your 401(k) and all investments when helping you plan for your retirement.  I find it amazing every time that I hear of some brokerage firm that forbids its registered reps from providing clients advice on investing their 401(k) account because the plan is not offered by their firm.

As a starting point, check out the retirement planning calculator tool at the end of this post.  You may have seen this in several other blog posts on this site, but I feel this is a critical step for many of you and I hope that you will take a moment to utilize this tool.  Nobody but you will see your information or the outcomes.

While this is an excellent tool, please remember the results only provide a first step in the retirement planning process.  This is not a substitute for an in-depth financial plan done by a qualified professional.

Please contact me at 847-506-9827 for a free 30-minute consultation to discuss all of your 401(k) and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Retirement plan sponsors, do you need an independent review of your company’s plan?  Do you need help selecting a new plan provider?  Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees?  Would you like to offer your plan participants access to fee-only, unconflicted advice on how to manage their 401(k) accounts and plan for their retirement?  Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors

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Led Zeppelin and Your 401(k)

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Led Zeppelin -- Led Zeppelin

Andrea Coombes recently wrote an excellent piece for Market Watch entitled “401(k) savers are confused and stressed.”   The title of Andrea’s article reminded me of the classic Led Zeppelin song Dazed and Confused.  Led Zeppelin is perhaps the greatest rock band of all-time.  Lead singer Robert Plant and guitarist Jimmy Page are true rock legends.  Dating myself a bit, I still have the original vinyl versions of Led Zeppelin II and Led Zeppelin III that I bought in my early teens.

Whether you prefer Andrea’s article title or the title of the Led Zeppelin song, the confusion felt by many 401(k) investors is real and is an impediment to retirement success.

Schwab Survey 

The Market Watch article cited several findings from a Charles Schwab survey of 1,004 people who invest in a 401(k):

But more than half of the 401(k) savers said their plan’s investment options are more confusing than their health-care benefits, and 57% said they wish it were easier to choose among their plan’s investing choices.

Forty-six percent of savers said they don’t know what their best investment options are, and 34% said deciding how to invest in their 401(k) is causing them a lot of stress. (The survey respondents ranged in age from 25 to 75, and worked at companies with 25 or more employees.)”

Too many choices 

A 401(k) plan sponsor for whom I serve as advisor had a menu of over 150 distinct choices when we first started working them.   We have worked with the sponsor and the plan provider to pare down  the menu to three tiers that include access to Target Date Funds; a menu of 16 core individual mutual funds; and access to a brokerage link for those participants who prefer a purely self-directed approach.

A 401(k) with too many choices always reminds me of my frustration with many of the excellent family restaurants here in the Chicago area.  The menus are complete to the point of being like a small encyclopedia and all the choices look great.  Add to that a desert display when you walk in and making a final selection is often difficult.

Target Date Funds 

I’ve long had a love-hate relationship with Target Date Funds.  On the one hand I love the idea of a professionally managed, instantly diversified portfolio.  For young 401(k) savers like my 25 year daughter I think this is a great option.  She gets instant diversification and a portfolio that is appropriately aggressive for her age.

For investors in their 30s and 40s and beyond I’m not as sold on Target Date Funds.   By this time I’d hope that you’ve accumulated some investment assets and are ready to take charge of your financial future.  To me this means that you have a financial plan in place that includes an investment strategy tailored to match your individual financial goals.

If you decide to go the Target Date Fund route make sure that you understand the underlying investments of the funds as well as the fund’s expense ratio.  Remember that you are not obligated to invest in the fund with the target date closest to your anticipated retirement date.  Lastly remember that Target Date Funds from different families with the same target date may be vastly different.  Do your homework before investing.

401(k) investing tips

In an earlier post on this blog, I listed 5 timeless tips for 401(k) investors:

  • Stick with it
  • Contribute as much as you can
  • View you 401(k) as part of your overall portfolio
  • Don’t ignore your 401(k)
  • Use Target Date Funds with caution

To these tips I’d add two others, keep it simple and get outside help if you need it.

Many plans offer low cost index fund choices.  For example a relatively simple, but diversified portfolio could be constructed from say a Total U.S Stock Index fund, a Total International Stock Index fund, and a Total Bond Market Index fund.

If you need outside help to allocate your 401(k) as well as your other investments, get it.  Many 401(k) plans offer advice or managed accounts that are more tailored to the individual participant’s situation than a Target Date Fund.  Beyond this consider hiring a qualified Fee-Only financial advisor to help you.

Not sure where you stand on your journey to a successful retirement?  Check out the retirement calculator at the end of this post.  While this is an excellent tool, please remember the results only provide a first step in the retirement planning process.  This is not a substitute for an in-depth financial plan done by a qualified professional.

A 401(k) plan can be a daunting and intimidating investment vehicle.  Being dazed and confused is great when listening to Led Zeppelin.  However this state of mind has no place in plotting your financial future.

Please contact me at 847-506-9827 for a free 30-minute consultation to discuss all of your 401(k) and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Retirement plan sponsors, do you need an independent review of your company’s plan?  Do you need help selecting a new plan provider?  Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees?  Would you like to offer your plan participants access to fee-only, unconflicted advice on how to manage their 401(k) accounts and plan for their retirement?  Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors

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Target Date Funds: 6 Considerations Before Investing

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Target Date Funds are a staple of many 401(k) plans. Most Target Date Funds are funds of mutual funds. The three largest firms in the TDF space are Fidelity, T. Rowe Price, and Vanguard with a combined market share of about 80 percent. All three firms use only their own funds as the underlying investments in their target-date fund offerings. Some other firms offer other formats, such as funds of exchange-traded funds, but the fund of mutual funds is still the most common structure.

Here are 6 considerations to think about when deciding whether to use the Target Date Fund option in your company’s retirement savings plan:

Is the Glide Path really that important?

Much has been made of whether the Glide Path (a leveling of the fund’s equity allocation into retirement) should take investors to or through retirement. Target Date Fund providers spend a lot of time devising and administering the Glide Path that their funds use into and through your retirement years.   Before making too much of this, however, the key question is what will you do with your retirement plan dollars once you retire? TDF providers hope that you take the money invested in their Target Date Funds and roll these dollars into an IRA with them, maintaining your Target Date Fund position.  There are big dollars at stake for them.  In reality you might take your money out of the plan and do something else with it, including consolidating these funds with other retirement assets already in an IRA perhaps at another custodian.

How does the allocation of the Target Date Fund fit with your other investments? 

Many 401(k) participants invest their retirement dollars in a vacuum—meaning they don’t take their investments outside of the plan into consideration when making their investment choices. This is fine for younger workers just starting out.  Their 401(k) investment might be their only investment and the instant diversification of a Target Date Fund is fine here.

For those with other outside investments such as taxable accounts, a spouse’s retirement plan, and perhaps an IRA rolled over from old 401(k)s, this is a big mistake. Given that TDFs are funds of funds you might become over or under allocated in one or more areas and not know it as your account grows. Factoring the Target Date Fund allocation into your overall portfolio is critical. 

Is the Target Date Fund closest to your projected retirement date the right choice for you?

For example, a 2020 Target Date Fund is conceivably meant for someone who is 58 and retiring in seven years. If you were to take three 58-year-olds and look at their respective financial situations and tolerance for risk, it is likely that they are all fairly different. Plan providers need to do a better job of communicating to plan participants that the fund with the date closest to their projected retirement date may not be the right fund for their needs. Look at your own unique situation and pick the TDF that best fits your needs. 

Understand the underlying expenses

In some cases, the overall expense ratio may be a weighted average of the underlying funds. Others may also tack on a management fee to cover the costs of managing the fund. As with any investment, understand what you are being charged and what you are getting for your money. 

Target Date Funds don’t equate to low risk

Many participants are under the mistaken impression that investing in a Target Date Fund is a low risk proposition. As we saw in 2008, nothing could be further from the truth. Many investors in 2010 funds saw losses in excess of 20 percent. A recent review of more than 40 Target Date Fund families showed the share of stocks in the funds designed for those retiring in the current year ranged from about 25 percent to about 75 percent. As with any mutual fund, look under the hood and understand the level of risk that you will be assuming.

Investing in Target Date Funds doesn’t guarantee retirement success 

Contrary to the belief of some, investing in a Target Date Fund doesn’t guarantee that you will have enough saved at retirement.  Building a sufficient retirement nest egg is all about how much you save and how you invest those savings.  Target Date Funds may or may not be the best investment vehicle for your needs.

Target Date Funds can be a good vehicle for 401(k) participants and others who are not comfortable allocating their own investments. Unfortunately, TDFs are not a set it and forget it proposition. Investing in Target Date Funds requires periodic review to ensure that the fund you have chosen is still right for your situation. Retirement plan providers and sponsors also need to do a better job of communicating the benefits, pitfalls, and potential uses of these funds to plan participants.

Please feel free to contact me with questions about 401(k) investment options or about your overall financial and retirement planning needs.  Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your Target Date Fund and all 401(k) investment options and to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you.  

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T. Rowe Price Target Date Funds – A Look Under The Hood

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This is another in a series of posts on Target Date Funds that I’ve written for this blog.  As both a financial planner for individual clients and an advisor to several 401(k) plans I have mixed feelings about them.  TDFs offer investors a professionally managed all-in-one investment solution.  Ideally you invest in the fund with a target date closest to your anticipated retirement date and the fund does the rest.

Personally I like TDFs more for younger investors versus those who are within say 15 years or so of retirement.  Target Date Funds have become a staple in 401(k) plans due to the safe harbor given to plan sponsors who use them as the default investment choice for those plan participants who do not make an election of their own.

Fidelity, T. Rowe Price, and Vanguard control about 80% of the assets in Target Date Funds.

Recently mutual fund ranking service Morningstar revamped its ranking methodology for Target Date Fund families.  They moved to the Gold, Silver, and Bronze rankings they implemented for mutual funds in 2012.  For the period ending December 31, 2012, only T. Rowe Price and Vanguard received the top Gold ranking.  Fidelity was ranked as Neutral.

Let’s take a look under the hood at the T. Rowe Price Target Date Funds.  T. Rowe offers funds with target dates beginning in 2005 and going out to 2055 in five year increments.  Additionally they offer an Income version of the fund for those already in retirement.

Active Management

T. Rowe uses mutual funds from its line-up of funds that are available to the public.  The underlying funds are almost exclusively actively managed in contrast to Vanguard’s use of its passive index funds.  The overall expense ratio of the funds is a weighted rollup of the underlying funds and currently ranges from 0.57% for the Retirement Income fund to 0.78% for the most aggressive fund, the Target 2055.  This is more expensive than Vanguard but all of the T. Rowe funds rank in the top quartile (less expensive) of their respective Morningstar categories. 

Solid Underlying Funds

Each of the 12 T. Rowe Price Target Date Funds received a ranking in the top quartile (the top 25%) of their respective Target Date categories, with 6 of the funds earning the top ranking or “0” from FI360 an outside service that ranks mutual funds and ETFs based upon 11 criteria.

Further, of the 19 underlying funds used across this target date series 17 had enough history to receive a 5 year Lipper ranking and 12 of those funds ranked in Lipper’s top quartile for the 5 years ended December 31, 2012.  This is a higher percentage than either Fidelity or Vanguard. 

Glide Path and Asset Classes

T. Rowe Price uses 12 asset classes in its TDFs; Vanguard uses 7; Fidelity uses 11.  This is not good or bad, but does reflect the broader approach employed by T. Rowe Price.  Note since the end of the year, Vanguard has added some funds in the fixed income area as well as some other tweaks.

T. Rowe Price’s Glide Path levels off at age 95 making it among the most aggressive of the target date fund families available.  By contrast Vanguard’s Glide Path levels off at age 72; Fidelity’s at age 80.  The Glide Path is the leveling off of the equity allocation of the fund as the investor moves into retirement and assumes that the investor will hold the fund until death; this may or may not be the case in reality.

Are Target Date Funds the Right Answer? 

As mentioned above, I have mixed feelings.  On the one hand TDFs are often a better solution than simply letting one’s retirement plan assets languish in a money market account.  On the other hand I am convinced that investors who are either comfortable doing their own allocation or who utilize an advisor are generally better served by tailoring an allocation from among the menu of investment choices offered in their 401(k) plan.

While I tend to favor Vanguard’s low cost passive approach, T. Rowe Price does an excellent job as well.  They have stuck to their knitting through the years and provide a solid option in the Target Date Fund space.

Check out Morningstar.com to look under the hood of T. Rowe’s Target Date Funds and to compare them against other alternatives that you might be considering.  Get a free trial for their premium services.

Please feel free to contact me with questions regarding your investments and your retirement planning issues.

 

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Friday Finance Links February 8, 2013 – Blizzard Edition

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Newsflash it’s February.  We finally got some real measurable snow in the Midwest; I think we have received 7 or so inches here in Chicago’s Northwest suburbs.  Good luck to our friends on the East Coast this weekend with the severe blizzard that is forecast.

Here are a few links to some great weekend financial reading.   

Personal Finance Blogs  

Miranda asks Is Your Income Information for Sale? at Cash Money Life.

Mike urges us to Beware of Backtested Market-Beating Strategies at Oblivious Investor.

Kay explains that Casinos’ tax contributions extend beyond Super Bowl wagers at Don’t Mess With Taxes. 

Posts from Fellow NAPFA Members  

Lon Jeffries asks Should You Delay Taking Social Security? at Figuide.com.

Robert Schmansky explains Bond Laddering: Generating Income From Your Portfolio at Figuide.com.   

Other financial articles from around the web 

Christine Benz shares How to Invest RMD’s You Don’t Need at morningstar.com.

Josh Charlson tells us that Morningstar is Bringing the Morningstar Analyst Rating to Target-Date Series at morningstar.com.

Dan Solin explains The Hidden Danger of Being a Sophisticated Investor  at usnews.com.

In case you missed it here is my latest post for the US News Smarter Investor Blog Should You Switch to a Roth 401(k)? 

Here’s wishing everyone a great weekend.

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Target Date Funds Don’t Guarantee Retirement Success

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A recent article in the Wall Street Journal professional edition was entitled “Target” Funds Still Missing the Mark. The premise of the article was that Target Date Funds were falling short in their investment returns and were doing nothing to help 401(k) participants regain some of the ground they had lost during the 2008-09 stock market decline.  Another Wall Street Journal Article in early 2011 cited an Alliance Bernstein survey of 1,000 workers which over half “mistakenly believed that using target-date funds would guarantee that their retirement income needs will be met.”

As both a financial planner working with individual investors and as an advisor to several 401(k) plan sponsors I find this survey result appalling and disturbing.  Moreover, it reinforces my concerns that 401(k) participants as well as some plan sponsors really don’t understand the pros and cons of Target Date Funds.

The fund companies offering them would be the first to tell you that there is nothing guaranteed about TDFs. There is a growing movement within the retirement plan space to add guaranteed-income products to Target Date Funds, but this won’t guarantee retirement success either.

Is a Target Date Fund the right choice for you?

The key to determining if a Target Date Fund is the right choice for your retirement savings is to understand them.  If you are considering a TDF for all or part of your 401(k) account or as an investment in general, here are two things to consider:

  • Target Date Funds from various providers with the same target date may vary widely as to their asset allocation and investment approach. There is no requirement that a TDF with a given target date have any particular allocation to equities, fixed income, etc.  The fund with the target date closest to your intended retirement might not be the best fund for your needs. As with any investment, you need to look at the fund’s investment allocation in light of your financial goals, risk tolerance, etc. You should also look at the fund as a part of your overall portfolio if you have investments outside of your retirement plan, such as IRAs, taxable accounts, a spouse’s retirement plan, and the like.
  • Many Target Date Funds are funds of the mutual fund company’s funds. This is the case for Vanguard, Fidelity, and T. Rowe Price, which collectively have about 80 percent of the TDF assets. This is not good or bad, but you should take a look at the funds that make up the TDF that you are considering. In some cases, I’ve seen fund companies use funds other than what I consider to be their top funds; perhaps they are looking to add assets to these funds.

Target Date Funds gather a huge amount of assets for the fund companies offering them, both as a component in many 401(k) plans and as a rollover vehicle when participants leave their employer.  Remember your investment choices should be all about you and what’s right for your situation.

Most of all, remember that the biggest single determinant in retirement success is the amount saved. If you start early, save as much as you can, have a financial plan in place, and make good investment choices, you will give yourself a good shot at accumulating enough to fund your retirement.  There are no guarantees of course.

Please feel free to contact me with questions about 401(k) plan and about your retirement planning needs.

Check out our Resources page for links to a variety of tools and services that might be beneficial to you.

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Friday Finance Links January 18, 2013

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Football season ended with a thud last week, the Packers defense laid a major egg. I hope they get the D fixed by next season.   On a more exciting note, our son will be singing the national anthem prior to the Northern Illinois basketball game tomorrow night.

Here is some great weekend financial reading.  

Personal Finance Blogs  

Miranda shares 8 Places to Research Your Potential House Before You Buy a Home at Free From Broke.

Kevin outlines 2013 Health Care Reform – Changes You Need to Know at Cash Money Life.

Carrie shares The Ultimate Lost of Tools and Resources for Successful Online Entrepreneurs at Careful Cents.

Joe tells us How to start contributing to a Roth IRA at Retire by 40. 

Posts from Fellow NAPFA Members  

Rick Epple shares 7 Steps To Financial Independence For The Small Business Owner at Figuide.com.

Claire Emory tells us that Retiring Abroad Requires Retirement Planning at Figuide.com.  

Other financial articles from around the web  

Josh Charlson explains that Diversification Pays Off for Target-Date Funds  at morningstar.com.

Jonathan Burton suggests 5 money moves to cushion a bond-market meltdown  at marketwatch.com.

Scott Holsopple tells us How to Pick the Right Annuity (If One Is Right for You) at usnews.com.

In case you missed it here is my latest post for the US News Smarter Investor Blog Why Financial Planning Matters. 

Here’s wishing everyone a great weekend.

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Merry Christmas and Thank You

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I want to wish all of you who celebrate a Merry Christmas and to everyone a happy and prosperous 2013.  I also want to thank all of you for your readership and support.

Since moving The Chicago Financial Planner to Word Press from Blogger in June, my readership has steadily increased and again I want to thank you for that.  Here are my top 5 most read blog posts since the conversion:

How much is Financial Advice Worth? was born out of a discussion with a financial advisor colleague about a new 401(k) advice service we were trying to launch for 401(k) participants.  I asked “So how much is competent, unbiased financial advice worth?  Part of the answer lies in the benefit that you expect to receive from spending the money.”

401(k) Fee Disclosure and the American Funds was written on the heels of the initial fee disclosures for 401(k) participants mandated by new regulations this year.  I used the multiple retirement plan share classes offered by the American Funds to illustrate the need for plan participants to understand these fee disclosures and the details of the funds offered in their plan’s lineup.

Why Financial Planning is Important-An Illustration is based upon and excellent infographic offered by NAPFA a professional organization of fee-only financial advisors of which I am a member.  The infographic does a great job of diagramming the need for financial planning and how the process works.  The statistics are sobering and illustrate the need for many Americans to seek the help of a qualified financial planner.

Target Date Funds-A Look Under the Hood looks at the composition of the “Big 3” Target Date Fund families:  Vanguard, Fidelity, and T. Rowe Price.  Together these three families control about 80% of the assets invested in Target Date Funds.  Target Date Funds are a staple in 401(k) and similar retirement plans.  They are frequently used as the default option for participants who don’t specify an investment choice.  However, like any investment, it is important that you understand how these funds will be investing your money and if their approach is right for you.

Can I Retire?  is the question that I am most often asked by perspective clients.  Can I Retire?  This is not a simple question to answer.  Moreover it’s not just about being able to retire, but rather can you retire “in style?”

Again I want to thank you my readers for your support and for your readership.  My question to you is how can I be of help?  What questions are on your mind?  Please use the contact form to let me know and I will do my best to answer them.

Also please feel free to let me know what you like or don’t like about The Chicago Financial Planner.  Your thoughts are important to me.

We will continue to evolve the blog into 2013 and look for ways to offer you more information about financial planning, investments, retirement plans, and related topics.

I hope that all of you have a wonderful holiday season.

Photo credit:  Wikipedia

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