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401(k) Trends: Target Date Funds

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Has your plan recently implemented Target Date Funds? Although they have been around for a number of years, Target Date Funds have grown in popularity exponentially in recent years. As plan sponsor fiduciary responsibility is emphasized more and more each year, these investment options have become more popular in 401(k) plans.

Target Date Funds

So what are Target Date Funds? They may go by different names, such as Life-Cycle Funds or Age-Based Funds, but the concept is the same. These funds are designed with a participant’s risk tolerance in mind based on their anticipated date of retirement. The funds are actively managed and the asset allocation is adjusted over the course of the participant’s lifetime as they near retirement. It assumes the participants will shift their risk tolerance to a lower level as they age, and therefore, the asset allocation is adjusted to that risk tolerance.

Target Date Funds are offered by many retirement plan service providers. The investment holdings within each fund will vary from issuer to issuer. Each issuer has its own asset managers, which may have different investment styles. Investment fees also vary from fund to fund. Each of these funds is made up of other underlying funds with their own expense ratios. Therefore, depending on the underlying funds, expense ratios could vary widely from issuer to issuer for comparable investments.

Although these funds have been designed to set a participant’s retirement account on autopilot, due diligence should be performed before investing in them. An individual’s personal risk tolerance, their investment style (active vs. passive) and other factors should be considered.

In addition, the implementation of these funds within a 401(k) plan does not take the responsibility off the plan sponsor for ensuring prudent monitoring and benchmarking is being performed on the plan’s investment offerings. There are many providers with Target Date Funds, and there could be various suites of Target Date Funds offered by the same provider. Proper due diligence should be performed when implementing Target Date Funds within a retirement plan.

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