New Kinds of Funds Growing Among 401(k) Investments

A major investment company reports that more than half of all workers have money in funds that make automatic investment decisions and 75% are projected to be invested by 2021.

The most popular of these types of mutual funds is called a Target Date Fund (TDF). TDFs automatically balance investments in stocks and bonds based on the employee’s targeted retirement year. Over time the fund shifts from risky investments that produce big returns to safe investments.

TDFs automate investment decisions that employees previously had to manage themselves. TDFs have also been shown to produce better returns by avoiding common investor mistakes, such as selling off when the market is low and buying more when the market is high.

Take-aways for Union Negotiators

Our employers should be offering TDFs as an investment option in our members’ 401(k)s. Ideally, employer 401(k) contributions should be going into TDFs by default, unless the member requests a change. This is especially preferred to 401(k) programs that put contributions into employer stock.

Bargainers should check the “expense ratio” of TDFs and all other 401(k) investment options. The expense ratio measures the percent of your investment that is taken as a fee to the investment fund every year. TDFs can charge a wide range of fees.

While the average asset-weighted annual expense ratio for TDFs fell from 0.99 percent five years ago to 0.71 percent in 2016, that's still not exactly dirt cheap in a world where plenty of index mutual funds and exchange traded funds are locked in a cost death-match that has pushed expense ratios below 0.20 percent.

Bargainers should be sure that our investment options have expense ratios near or below 0.20%. For instance, Vanguard TDFs have an expense ratio of 0.16%.

Links:

Retirement savers ditch the 'do it yourself' approach, opt for target date funds and professional guidance (CNBC, July 6. 2017)

Vanguard Target Retirement Funds (Vanguard)