4 Ways 401k Target Funds Disappoint

While there are many popular target funds out on the market, many do not provide the return you are looking for down the line from your investment. Target funds are often recommended because they are conservative and are balanced in a way that is aligned with your target retirement date. Target funds are low maintenance, and help investors keep a diverse and balanced portfolio. Despite these positive attributes, there are several ways in which these funds won’t meet your expectations for a balanced and successful investment portfolio.

1.Over Diversified

Believe it or not there is such a thing as being over diversified in your investments. You don’t want to put all your eggs in one basket but you also don’t want to be in a fund that is over stuffed with stocks and bonds to the point where they hold almost no position in anything. There comes a point where additional stock will not lower your risk and will only lower your returns. These funds rarely outperform their index and become detrimental to your portfolio.

2.The One Size Fits All Approach

One huge drawback to target funds is that they do not take into account an individual’s personal circumstances. These funds treat everyone the same and do not allocate based on your own career and risk tolerance. As you know everyone’s financial goals and background are different and there is no way that these funds can fit everyone’s profile. Furthermore, if you plan on retiring early good luck, these funds have target dates for a reason.

3.Too Many Managers

Many target funds are huge and therefore have numerous managers, some as many as seven or eight. With this many people managing the fund it is hard for there to be one clear direction and investment plan. When a fund is multi-managed and lacks a coherent strategy it often underperforms. While this true of many mutual funds, it is especially true of target funds.

4.Little to No Return

Target funds, like index funds, usually follow the pace of the market and particularly the benchmark index (usually the S&P 500) that the fund is pegged to. When you factor in all the fees it’s easy to see how your return can quickly wither away.

When you receive your statements in the mail don’t just put in a pile and ignore it. Actively review yours statements for these pitfalls and then take action. Never forget that this is your money and your retirement. It is easy to put your money in a target fund and forget about it for years but nobody said investing was easy. Work with a professional and educate yourself so that you make smart investment decisions. There are plenty of funds available to allocate your money so do your research. You will thank yourself when it is time to retire.

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The information supplied in this article is not to be considered as medical advice and is for educational purposes only.