Why They Might Not Be Your Best Retirement Strategy


The money you put into your 401(k) plan doesn’t have to stay in cash. Rather, it is money that you could invest and put to work.

The problem with 401(k) plans, however, is that they usually come with a default investment option where your money will go unless you make changes. And if you don’t make changes, you risk stunting the growth of your savings.

Employer-sponsored 401(k)s often default to savers’ investment dollars in target date funds. These funds are designed to balance your investments over specific time horizons. For example, they may start out more aggressively and then become more conservative as they approach retirement.

But a target date fund isn’t necessarily the best option for your money. Worse yet, you may not even know you’re invested in one.

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In a recent BlackRock report, more than 25% of workplace savers said they didn’t know whether or not they had money in a target fund. But it is important information to have.

The problem with target date funds

Target date funds are an appropriate investment for some savers — but they’re not necessarily the best way to invest your 401(k). A big problem with target date funds is that they are often too conservative. It’s not a good thing if you try to be aggressive in growing retirement wealth.

Recent inflation data has made it clear that retirement savers need to be aggressive about growing their money to avoid a shortfall. But a target date fund may not allow this.

Another problem with target date funds? Their fees can be notoriously high. And those fees might not be worth paying when you can just load broad index funds into your 401(k), which tend to charge considerably lower fees.

Do you need to make changes to your 401(k)?

If you’ve been contributing to your 401(k) regularly but haven’t selected any investments in your plan yet, chances are your money will be put into a target fund. If so, you may want to move your money around so that you are not limited to just this fund.

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The advantage of investing in target date funds is that you don’t have to think about how your 401(k) assets are allocated. But if you stick to this hands-off approach and don’t make changes, you could end up with a lot less money in retirement than you hoped.

Instead of sticking to a target date, take a look at the different index funds your 401(k) offers. You may find that you have a number of fund choices that fit your investment strategy.

You may even decide to put some of your money in actively managed mutual funds. Like target date funds, these funds are known to charge higher fees. But the return you get in one of these funds could exceed the return you get from a target date fund.

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