When it comes to choosing investments in a retirement plan, picking one that seems the most hands-off may be enticing. For many, that means investing their money in a target date fund, a combination of stocks, bonds, and cash that becomes more conservative as the target date nears.
A professional fund manager monitors the fund, and adjusts the underlying investments as needed for the time frame. While a diverse, all-in-one fund may seem like an easy choice, it’s important to understand what it offers – and what it doesn’t. Below, we clear up some common misconceptions about target date funds.
Myth 1: target date funds are only for retirement
While target date funds are most commonly used in retirement plans, that doesn’t mean they can’t be used for any other long-term savings goals. Target date funds can help students and their families save for future college expenses. Ideally, you would invest in a target date fund at least 10 years before your child’s expected college enrollment date. Doing so gives the target date fund time to move through its “glide path,” which determines how the asset mix changes as the target date approaches.
Myth 2: target date funds eliminate risk
Target date funds may seem safe since they take the responsibility of allocating assets out of your inexperienced hands. While professional management is one of the benefits of a target date fund, that management can’t eliminate risk or guarantee a specific return. Target date funds are subject to market forces and other risks just like other investments.
myth 3: all target date funds are pretty much the same
Each target date fund has its own risk profile, asset mix, and fee structure. They also have unique glide paths, which describe how the asset mix in the fund changes over time. Some have what are called “to” glide paths, which reach their most conservative mix at the target date. They are generally more conservative than “through” glide paths, which continue to pursue growth after the target date.
myth 4: you don’t need to keep track of your target date fund
Target date funds work as a “one-size-fits-all” plan. Your current financial situation, goals, and risk tolerance aren’t considered. It’s up to you to determine whether a target date fund is appropriate for your situation and then to monitor its results to be sure it’s meeting your expectations.
The financial consultants at Hanscom Investment Services† can help you understand your options for saving and choosing investments that are right for you. Schedule a free consultation with Hanscom Investment Services at www.hanscomfinancialservices.org or call 800-656-4328 ext. 2236.†
†Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Hanscom Federal Credit Union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Hanscom Investment Services, and may also be employees of Hanscom Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Hanscom Federal Credit Union. Securities and insurance offered through LPL or its affiliates are:
Not Insured by NCUA or Any Other Government Agency / Not Hanscom Federal Credit Union Guaranteed / Not Hanscom Federal Credit Union Deposits or Obligations / May Lose Value