Pick. Click. Close.

Growing in popularity within employer sponsored 401(k) retirement plans are the target-date funds. Simply explained:  You pick the date you plan on retiring, then select the target date fund closest to that year, and voila, you’ve just implemented an investment strategy. Based on that date, your 401(k) will be allocated with a corresponding mixture of stocks, bonds and cash equivalents. The further out your retirement date, typically, the larger allocation of stocks you’ll have. And over time, as you get closer to that “target date”, your stock allocation will decrease and your bond allocation will increase. Even more simply put:  The target-date fund puts your 401(k) on autopilot – becoming more conservative as you get older.

Easy? Yes.

Right for you? Depends.

What you gain in ease of use you may lose in personalization. When you choose a target date fund, you’re choosing a bundled allocation of mutual funds. If you’d prefer to select your own funds from the menu afforded in your plan, then the target date funds may not be for you. And please note, just because you’ve chosen the “Target-Date 2045” fund, for example, doesn’t mean you’re going to have enough money in your account to retire in 2045. It simply means your allocation between stocks/bonds/cash is based on that selected date for retirement.

For our purposes, we’re talking about target-date funds within your company’s retirement plan. If you’re comparing target date funds outside the company sponsored plan, there are a host of other considerations. Between different target-date fund companies, you will find different expense ratios, and different strategies as well. For example, some may attempt to manage your retirement allocation “to” retirement, while some will attempt to manage your allocation “through” retirement. Big difference. Some of us may desire (or need, most likely) continued growth opportunities during retirement. The checks may stop during retirement but the bills likely won’t, right?  Some may be actively managed while others may utilize a passive management strategy. You may also find that Company A’s Target-Date 2045 fund has a significantly higher stock allocation during the retirement years than Company B’s.  And that’s an important side note, by the way. If you don’t need to take the risk of Company B’s fund to accomplish your goals and objectives, then why would you?  Just know that there could be important differences between same-date funds. (The matter of risk is a blog post all its own – and soon to come I might add.)

Bottom Line:  If you prefer the hand’s off approach, then a target-date fund might be for you. If you enjoy rolling up your sleeves and doing your own research, then they may not.  They do have a place in many investors’ retirement strategies and that percentage is growing. If it’s an option within your plan, you might want to check it out.  If it’s not offered through your plan, you may still want to check them out. Diversification within retirement resources can be a great thing…and that’s yet another post to come.