When it comes to enrolling in a company sponsored retirement plan, often one of the most confusing aspects is deciding where to invest the contributions or deferrals coming out of a paycheck and going into the account. “Where do I begin? Do I need to build my own portfolio, based on the menu of options my employer has set forth for me or is there another option?” Employer sponsored retirement accounts such as a 401(k) or 403(b) are considered “Participant driven” accounts. In a participant driven account, it’s up to each individual to select his or her own investments. This can be a daunting task for someone who has limited knowledge of stocks, bonds, money markets, etc. and the investment process.
Many employees are asking if there is an option that is more of a “Hands-off” approach. Is there an option for someone that does not want to choose their own investments, but rather has that process done for them? The answer is yes. Included in most employers' menu of investment options within the retirement plan are Target Retirement Funds.
What are they?
A target retirement date fund is a mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. Target retirement date funds are an option that does everything for a participant. Each one has a date, a date that most closely corresponds to the year or closest year in which the participant plans to retire. A participant would not need to pick and choose from a menu of investment options, allocating funds to a mix of money market or stable value funds, bond funds and stock funds. Instead of having to choose a number of investments to create a portfolio that will help them reach their retirement goals, participants are able to simply choose a single fund designed to help them reach that goal.
Using Vanguard’s Target Retirement Date Funds as an example, each of the Target Retirement Funds invests in Vanguard's broadest index funds, giving someone access to thousands of U.S. and international stocks and bonds, including exposure to the major market sectors and segments. The funds' managers gradually shift each fund's asset allocation to fewer stocks and more bonds so the fund becomes more conservative the closer the participant gets to retirement. For example, a younger worker hoping to retire in 2050 might choose a target-date 2050 fund, while an older worker hoping to retire in 2025 might choose a target-date 2025 fund. Because it has a longer time horizon, the 2050 fund would likely be weighted heavily toward stocks, with a relatively small percentage of bonds and cash equivalents, while the 2025 fund would hold relatively more bonds and cash equivalents and fewer stocks so it would be less volatile, much more conservative. The fund’s managers then rebalance the fund’s assets each year (Automatic Rebalancing) and keep its investments on track to meet the fund holders’ goal of using that investment to begin paying for their retirement in a particular year, freeing them from the hassle of ongoing rebalancing.
Each fund is designed to help manage risk while trying to grow your retirement savings. Its returns are not guaranteed however, but depend on how the market performs. Participants do need to take into account their own risk tolerance when choosing which fund is right for them. One participant wanting to retire in 2050 might have a different risk tolerance than another participant wanting to retire in the same year.
Retirement Isn't the Finish Line
Maybe you’re okay trading savings today for security tomorrow but your investments don’t have to stop growing just because you retire. Most financial experts plan for people to spend 20 to 30 years in retirement. Giving up on risk at this stage could mean giving up on returns that can sustain you through retirement. To this point, a Vanguard Target Retirement Income Fund for instance, designed for someone who is already in retirement, would still contain 30% of its assets in stocks, working for you and still harnessing the power of compounding earnings.
When it comes to enrolling in a company sponsored retirement plan, a Target Retirement Date Fund just might be the answer to the questions “Where do I begin? Do I need to build my own portfolio?” Is there a more ‘Hands-off’ approach?” Target-date funds are becoming more and more popular with 401(k) Retirement investors. In fact, within retirement plans currently administered by Union Bank & Trust, approximately 35% of participants have assets in a Target Retirement Date Fund.
Contact a Union Bank & Trust Financial Education Consultant at firstname.lastname@example.org to learn more about the target retirement date funds that may be included within your employer’s retirement plan.
The information provided herein is provided for educational purposes only. It is provided with the understanding that neither Union Bank & Trust Company, the Plan Administrator, nor your employer are providing legal, accounting, tax, investment, or other professional advice. Pursuant to the terms of the Plan, you are responsible for directing the investment of all or a portion of your Plan benefits. Accordingly, it is recommended that you seek advice from a qualified advisor for assistance in selecting the investments that are most appropriate for your situation.