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Tuesday, August 30, 2011

According to a recent article in the Wall Street Journal, some employers are taking a hard look at their 401(k) plans’ target-date investment funds.  These funds target a future year geared to the expected retirement date selected by the participant.  They attempt to simplify investing for the average participant by gradually adjusting the asset allocation over time by moving away from equities toward fixed income investments, becoming more conservative, as the target date approaches.  This approach accepts more volatility in hopes of obtaining larger gains at younger ages and less volatility and opportunity for gain as retirement and the need to use the money approach.

While these fast growing funds became popular by offering a convenient one-size-fits-all choice for investors, recent criticisms imply simpler might not always be better.  The 2008-09 financial crisis and the recent 2011 volatility highlight that target-date funds simply offer investors a different (though usually more complex) portfolio management style and do not eliminate investment risk.  Also, scrutiny over fees and ability to customize portfolios to a specific group are areas prompting employers to take another look to find ways to benefit employees.

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