I advise in Tax, Insurance and Investments primarily in Western PA, but can and do travel where I need to in order to serve my clients and prospects at the level they deserve.
I recently read an article that over 60% of 401k investments are made into "Target Date Funds", but also, in that same article, 46% investors are clueless about their investments. That's almost half!
Let's break this down, shall we. Many 401k plans these days have implemented both Auto Enrollment and QDIAs (Qualified Deferred Investment Alternatives) into the company retirement plan. This can be simply explained as whether you chose to invest in your company's 401k or not, you are automatically enrolled, that choice has been made for you, and if you don't choose your investments, you will be placed into a QDIA investment based on your projected retirement date.
As a financial services professional, I understand why this was done. Forcing people to invest in their retirement so they aren't left destitute and relying on government assistance in old age because they lacked the foresight to take such actions on their own is not an overall bad thing. However, I'm also a bit of a libertarian, and don't particularly like outside forces making life decisions for me.
Being that 60% of 401k investments are made into Target Date Funds, per this article, and that Target Date Funds are the premier recipient of Qualified Deferred Investment Alternatives (where your money goes, whether you chose it or not), it's important to understand how these Target Date Funds work.
Target Date Funds work on a principle known as a "glide path." This glide path assumes that you will be aggressive in your investment choices when you are younger and have time to recover from a significant market downturn, while taking advantage of the potentially higher returns being aggressive will yield, and they will "glide" to more conservative investments as you get older. That is, invest in lower yielding, more income and less growth, but also, hopefully, less volatile investments. This is not a bad strategy, the only "bug" in the proverbial soup is if you don't adhere to the "traditional" marriage and family forming structure put into place over time, your investments could head into "income mode" too early.
In a traditional "glide path," couples would get married and start their families in their late 20s or early 30s and by their late 40s/early 50s their kids would be done with college/trade school/ other post-secondary education, the couple would be in their peak earning years, pack more into their retirement (instead of education funding vehicles such as 529 plans) and soon after that point the investments would start on the "glide path" to more conservative investments as the couple hits their 60s and then decide to hang it up on their primary career.
At one point in time, that path probably worked well and applied to the vast majority of folks, but does it still? With late in life family formations and childbearing, second and third marriages and additional family formations, unforeseen layoffs, economic upheaval, COVID pandemics, rampant inflation, other economic maladies affecting families, and people working well into their 70s and beyond, the "traditional" way of doing things may not be occurring as it once did. Your retirement plan's Target Date "glide path" might start leaving equities and heading toward more conservative income producing investments when you don't have an income problem because you are still working for another 10 or 15 years! You still need growth! Unfortunately, the Target Date Fund that you were placed in does not know this, and heads on its designed path. If you are part of the 46% that claim to not understand investments, you are unable to change course based on real life conditions. This could pose a problem in later years because you could fall short and outlive your money. Not good.
Consider consulting with an independent financial advisor and/or financial planner before you get down the road too far. He or she should be able to design an investment mix that will better adapt to your individual situation as opposed to a pre-determined path.
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