By Ryan Glinn, CFP®, MBA, CLTC®
With the growing popularity of Retirement Target Date Funds within qualified plans such as 401(k)’s, 403(b)’s, and 457(b)’s, many people tend to think their retirement eggs are in one basket. Some folks see online or on their statements that they own and contribute to one mutual fund, and they think they are not well-diversified. This simply is not the case.
Most Target Date Funds own a blend of U.S. and International Stocks. This stock ownership often consists of Large Cap, Mid Cap and Small Cap companies. This exposure will likely be to a blend of both Growth and Value firms. Furthermore, we can break down equity ownership across a variety of sectors, from technology and healthcare to utilities and financial services. Overweights and under-weights to the indices will be determined by your specific fund manager (T Rowe Price, Fidelity, American Funds, etc.).
As one gets closer to retirement, Target Date Funds will also own a blend of government, corporate and securitized bonds at a variety of credit qualities and maturities. Bonds provide another important layer of diversification. As of September 3rd, the S&P U.S. Aggregate Bond Index was up 7.13% year to date. The S&P 500 stock index was up 6.94% through the same period. Quality bonds, such as treasuries, tend to increase in value during
The idea that Target Date Funds are not diversified clearly is not true. However, where an investor can lack diversification is amongst tax
types. Target Date Funds are most often seen in 401(k)’s and other qualified plans, which is where most Americans have the bulk of their retirement
savings. The catch here is that if you retire with only qualified assets, every dollar you spend from them will be taxed at ordinary income rates. Diversifying your savings along the way to include cash, non-qualified accounts taxed at capital gains rates, as well as Roth dollars can provide you more spending flexibility throughout retirement.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
The information provided does not constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Consult your financial professional before making any investment decision. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.
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