They may already have arrived.
Lost in the investment advice to 401(k) plan participant discussion has been the rapid growth of target maturity funds to 401(k) plan investment menus. According to Lipper Inc. approximately 55 fund families offer these types of funds with assets in excess of $50 billion.
Don’t confuse target maturity funds with asset allocation funds. While both provide the convenience of diversified investing in a single mutual fund, asset allocation funds, also called lifestyle funds, are based on risk tolerance, e.g., conservative, moderate, or aggressive. Target maturity funds, on the other hand, are constructed to offer 401(k) participants a fund that matches their retirement date. These funds target the year of retirement and the asset allocations change over the years toward conservative as retirement nears.
But how do you make sense of them? Al Otto, Vice President of White Horse Advisors, writing in the August 2006 issue of The McHenry Group’s The Inside Edition suggests a process which includes:
- How to choose them from the perspective of the plan sponsor and the participant
- Evaluating their performance
- Understanding their risk
- Understanding asset allocation within the funds themselves
- Analyzing their cost
- Evaluating the fund family that is offering target funds
Here is the link to Mr. Otto’s article.