Human Interest - The 401(k) provider for small and medium-sized businesses

Target-Date Funds: Quick and Easy Investments Aren’t Always the Best for 401(k) Plans

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In recent years, the TDF has become a dominant force in 401(k) retirement plans and appears to be an easy investment pick. Yet there are downsides to consider. In fact, target-date funds were just named a “ticking time bomb of ERISA legislation.”

What are target-date funds?

Target-date funds (TDFs) are mutual funds that offer decreasing levels of risk as retirement nears. Accordingly, they tend to come with lower returns over time. TDFs, sometimes called lifecycle funds, are securities that gradually move assets from stocks to bonds as a target date approaches. The target date is the expected date of retirement. For example, a TDF with a target date of 2030 would be aimed at someone planning to retire in the year 2030.

What to know about TDFs:

While prevalent and simple to use, TDFs have their drawbacks

While they were designed to be easy-to-use products, recent scrutiny suggests that TDFs may face litigation for not adhering to a fiduciary responsibility, that is not acting in consumers’ best interests. Here are some reasons why.

The biggest question: What happens beyond retirement day?

And this issue brings us to the last point, which is what happens when the target date is reached. While this time is when most investors will begin withdrawing funds, inevitably some assets will remain. Investment strategies post-retirement vary from fund family to fund family. Some funds continue shifting assets to bonds and cash for up to 30 more years, while others just maintain the strategy in place when the target date is reached. Neither approach will work for all investors. It’s important to understand how your money will work for you not just leading up to the day of your retirement, but throughout your retirement.

Managed accounts offer additional services

While a target-date fund looks through a narrow lens (at only the expected retirement date), a holistic approach to planning for retirement may consider other factors such as risk tolerance, life expectancy, other retirement accounts, goals, and anticipated cost of living during retirement. A managed retirement account tends to do a better job of factoring in these types of important variables, rather than setting up one investment based solely on a planned retirement date. While offering advantages over TDFs, 71% of 401(k) plans offer TDFs but only 40% offer a managed account.

At Human Interest, we have found that low-cost index funds perform better over the long term than lifecycle funds do. That’s why we offer a large assortment of index funds. One example is Vanguard’s S&P 500 Index fund, which is available through the Human Interest portal and has an expense ratio of just 0.04%. This is one of the lowest management fees in the industry.

In total, we provide our clients with more than 30,000 mutual funds. This allows for a much greater degree of diversification for employees than an automatic plan that just puts all employees, regardless of their individual circumstances, into lifecycle funds. Because we know that everyone’s situation is unique, and requires individualized service, we offer free, personalized investment advice to employees who need it. And, workers with a Human Interest 401(k) can trade their own selection of funds if they wish, as we have no financial connection to any fund or fund family.

Human Interest also has an automated investing program that combines tailored investment service with regular rebalancing, i.e., periodic buying or selling of assets in a portfolio to maintain a specified level of asset allocation or risk. Other advantages of a Human Interest 401(k) include greater access to global assets, our focus on reducing fees, and an emphasis on long-term appreciation rather than short-term gains.

For more information on Human Interest’s low-cost 401(k) services, click here to learn more about how it works.

The Human Interest Team The Human Interest Team

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

Small and medium businesses can be prepared, too.

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Human Interest - The 401(k) provider for small and medium-sized businesses

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Get free 401(k) resources now. Learn more about 401(k)s for you and your company.