Target-maturity funds, a/k/a life cycle-funds, have made significant inroads into 401(k) plans, They’re now a common sight on the fund menus of many 401(k) platforms. The recent Department of Labor regulation on default funds in which target-maturity funds are one of the fund types that can provide fiduciary relief has further spurred their growth.
Target-maturity funds are not the same as asset allocations funds. Both provide the convenience of diversification using only one fund. But they differ. Asset allocation funds, a/k/a life-style funds, are based on risk tolerance, e.g., conservative, moderate, or aggressive. Target-maturity funds, on the other hand, are constructed to offer 401(k) participants a fund that matches their retirement date. The asset allocation changes over the years and becomes more conservative, i.e., less equity exposure, as retirement nears.
While much has been written about target-maturity funds from the plan sponsor’s standpoint, there has been little information available to 401(k) participants to help them decide whether to invest in these types of funds. Pamela Yip’s article in the Dallas Morning News, "Are life-cycle funds right for you?" provides an excellent guide that 401(k) participants can use to make that decision:
- Pay close attention to fees.
- Evaluate the performance of the fund over at least five years.
- Evaluate the fund’s managers and their tenure.
- Decide whether you’re willing to put all your eggs in one basket and let the fund handle your asset allocation.
- Decide if a life-cycle fund complements your employer-provided benefits.
- Choose a fund that will provide enough of a return to fight the ravages of inflation at retirement.
Here is the link to Ms. Yip’s article.