Are these popular retirement funds the best place for your money?

Many people have access to a 401(k) plan through an employer. And if you are one of them, it is usually advantageous to register.

The benefit of participating in a 401(k) is having access to employer matching funds. In addition, contributions are transparent. Because they’re considered initial payroll deductions, there’s little work to do once you sign up.

But that doesn’t mean you don’t have to put any effort in your 401(k). While you don’t have to actively write a check every month, you do need to make sure your money is invested appropriately. And to that end, you might be inclined to put your money in a target date fund. Whether that’s a good idea, however, is up for debate.

Image source: Getty Images.

How target date funds work

Target date funds are set up to invest your money more aggressively early on, then move into more conservative investments as your designated milestone arrives. In the case of a 401(k), a target date fund would force you to invest in more aggressive investments before retirement, like stocks, and then turn to safer investments, like bonds, later. approaching retirement.

When you first open a 401(k), you will usually be automatically enrolled in a target date fund. And from there, it will be up to you to choose another house for your money or leave it where it is.

In fact, in a recent Vanguard report, 81% of all 401(k) plan participants used target date funds. And 69% had their entire retirement account invested in such a fund. But there are pitfalls to relying on these funds to meet your retirement savings goals.

Target date funds could mislead you

Although target date funds are touted to take the guesswork out of investing, they tend to err on the side of being overly conservative. This, in turn, could leave you with a lack of savings once retirement begins.

Additionally, target date funds tend to charge high fees. These could eat away at your yields over the years, reducing your nest egg.

An alternative to explore

It’s easy to see the appeal of target date funds. In theory, they allow you to reach your savings goals without having to do a lot of work.

But if that’s a route you’d like to take, there might be a better solution: index funds. These are usually found in 401(k)s and the advantage of owning them is that they often charge lower fees than target date funds. And depending on the funds you choose, the investments at your fingertips might lend themselves better to growing your retirement plan.

Another option is to split your savings between a target date and index funds. It’s a good choice to consider if you’re a more conservative investor.

Know how you are invested

No matter how you choose to invest the money in your 401(k), don’t make the mistake of opening an account and not knowing where the money is going. Chances are it will end up in a target date fund. And while that’s not automatically a bad thing, it’s important to understand how your contributions are being invested and whether this option is likely to make your long-term goals achievable.

Comments are closed.