Details About Target Date Funds Explained by the DOL

DOL Explains how Target Date Funds Work

If you offer a 401(k) plan in your employee benefits package, you may have the option of including certain mutual funds called target date funds in your list of investment choices.  A target date fund is a mutual fund that contains a mixture of high risk and low risk assets such as stocks and bonds.  Target date funds are geared for those who want to save towards a certain date in the future, such as retirement.  If the target date is far into the future, the money would be invested in higher risk investments that have the potential for a greater return. As the target date gets closer, the proportion of high risk and low risk investments are managed to change over time so that by a certain date, the money is invested in more conservative assets to lessen the risk of losing money.  Like all mutual funds, however, there is no guarantee that you won’t lose money.

The advantages of investing money in a target date fund is that the asset mix automatically changes over time, which makes it convenient for the investor by taking a more hands-off approach and letting the investment changes happen automatically.  But critics of target date funds are concerned that a one-size-fits-all approach may not work for everyone.  It’s important for anyone who invests money in mutual funds, especially 401(k) plan participants, to understand that not all target date funds are alike, and each company that offers target date funds can take a different approach to managing the money in that fund.

Earlier this year, the DOL and SEC issued a four page bulletin called Investor Bulletin:  Target Date Retirement Funds to educate investors about target date funds.  It explains what target date funds are, and how different funds with the same target date can have very different objectives for managing money up to retirement (where the asset mix will have little or no changes after the target date), verses through retirement (where the asset mix continues to change for many years after the target date).

Note the last page of the bulletin contains links to further information from the DOL and SEC about saving for retirement, investing basics, mutual fund information, and a guide to 401(k) plan fees.  This document can be distributed to plan participants or posted on your website.

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