REAP 2: Not All Target Date Funds Are Created Equal
Josh & Jay welcome Chris Roper, Plan Success Consultant with Qualified Plan Advisors and Chris Bouffard, Managing Director of Wealth Management for Prime Capital Investment Advisors to the Deep Fried studios for Chapter 2 of our Retirement Planning and Education (REAP) Series, a 4 part series discussing important topics that business owners should know about their employee retirement plan offerings. In this episode, the guys discuss target-date funds, and how a product that seems so consistent across companies can vary so much in equity exposure and asset classes. Target date funds have become the de facto choice for a lot of retirement plan participants, so it’s more important than ever to understand the fundamentals of how these products work. From fee compression to increased litigation to more educated plan participants, the days of “set it and forget it” are over. Take a listen to what you as a business owner need to know about your 401(k) plan!
> A target date fund is a 401(k) option that is based on your current age, then forecasted to a traditional retirement age of 65. The fund will typically start out more aggressive then become increasingly conservative as you get closer to the retirement year. Target date funds full under the “do it for you” options of your 401(k) choices.
> A target date fund is typically listed with the year of retirement, i.e., the year 2030, 2040, etc. At first glance it would appear that all target date funds with the same retirement year would function exactly like each other, but the reality is that the funds from different companies could have significantly different equity exposures, that is, because of a higher percentage of held equities there is more volatility in one target date fund compared to another, even with the same retirement year listed on the funds.
> In addition to different ratios of held equities, target date funds can differ in asset classes, all of which can lead to differences in performance and risk tolerances.
> Target dates fund are by far the fastest growing fund choice in qualified retirement plans, and given that many investors hold the majority of their retirement assets in a qualified plan like a 401(k), understanding how target dates funds work and the differences among them is very important to plan participants and plan sponsors.
> Share classes are important because they impact the overall expense of your plan. Listen in to this episode where we discuss “ethically farmed Mardi Gras beads” for a real world example of how a business owner could potentially save money with proper share class negotiation and selection.
If any of these topics apply to your situation, we can help! Reach out to us at 251-327-2124, or email [email protected]