Why Your Employer Might be Creating Liability with your 401K Plan
Employers are required to be wise fiduciaries of their 401 K plan offerings. This means that they are required to provide wise choices that take reasonable risk and are in the employee's best interest. So they have reduced risk by gravitating towards Target Date Funds. These funds are easy to understand and offer age-appropriate risk level as you get towards your target date for retirement. So, for example, let's say you are retiring in 2035. You would invest in the target date 2035 fund. Then as you age, the fund managers will decrease your risk level, getting you ready for less risk and retirement.
Does it really work that way? Let me offer you two examples.
First, let's say that you retired in 2005 and invested your money in the Fidelity Advisor Freedom 2005 fund. You are three years into retirement, and the financial crisis hit. Between October 1, 2007, and February 28, 2009, that fund lost -33%, according to Morningstar. Do you think that they were taking to many risks?
Howard Gold, with Marketwatch, wrote this article, pointing this out about the most recent losses by target date 2020 funds.
"From February 20 through March 20, which coincided with almost all of the recent market selloff, target-date 2020 funds from Fidelity, Vanguard, and T. Rowe Price lost 19%-22% of their value, according to Morningstar Inc. (After the recent rally, they're 11%-14% off their highs.) Vanguard had the lowest equity allocation—50% domestic and international stocks—while T. Rowe Price's 2020 target fund had 58% in equities."
The bottom line is that they are taking to many risks when it matters the most. You can see this in how big a percentage they are investing in stocks. If you like the target date funds, do your research because the very funds that are designed to reduce risk might just be creating liability.