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Target-Date Funds: A Straightforward Retirement Benefits Choice

Pat Kavanaugh, Morningstar Investment Management LLC

 

A lack of investment knowledge, or a lack of confidence about it, is among the biggest obstacles in getting employees to make use of their retirement benefits and save for the future. Some employees get overwhelmed by the process or fear they will make mistakes about their choices, so they put off making a decision.

We understand the challenges plan sponsors face when it comes to helping employees prepare for retirement, and we’ve discussed a few options for consideration in a previous post. Let’s take a closer look at one of those options: target-date funds.

What are target-date funds?

Target-date funds can be a simple solution from an employee perspective. A standard target-date fund is an off-the-shelf solution that offers an investment portfolio that considers a retirement date. It reflects what the fund manager believes is the best asset mix for the average investor by age and expected retirement date.

When are target-date funds a good retirement benefits option?

Target-date funds are often readily available through a recordkeeper’s platform, so they are typically easy to implement. And because there is so much public information available on target-date funds, the process for the plan sponsor to conduct due diligence can be straightforward. Cost can also be considered a potential benefit. There generally are no additional fees required for off-the-shelf target-date funds, aside from the underlying expenses. At a company with demographically similar employees (similar incomes, costs of living, etc.), or in the absence of an investment committee, a target-date fund may be all that’s needed.

What are some factors to consider with target-date funds?

Like anything striving for an average path, target-date funds might not hit the mark for most participants. Because the allocations are based only on years to retirement, they consider the asset mix for an administrative assistant the same as an executive at the same company. They don’t take into consideration outside assets, savings behavior, or retirement income needs. Often a participant is enrolled automatically, and rarely are participants encouraged to increase their savings rate over time. In some cases, the solution may consist of only the recordkeeper’s or target-date fund provider’s proprietary funds, which may not be the most suitable options. But for employees, it can be an easy option that encourages them to take advantage of their retirement benefits. And why have benefits that employees don’t use?

Which Retirement Plan Investment Option is Right for You?

If you need more information to determine which option might be best for your plan, you can read our full analysis. "How Can You Help Your Employees Retire?"
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