A Look Under the Hood

By Justin Bolmgren

“Target” is in Sight?

Saving for retirement is never easy, but target date funds can eliminate the guesswork in choosing your 401(k) plan investments. They offer one-stop shopping and set-it-and-forget-it investing — just what most people should be looking for.

Rather than choosing a mix of stocks and bonds to create a diversified portfolio, you can select a single fund designed to have the right combination of assets based on when you plan to retire — your "target date."

But a look under the hood, we notice the age old “cost for convenience” decision.  For example, one of the largest target date fund providers, Fidelity Freedom Series funds, has expense ratios in the .60% ballpark.  The fund invests in a basket of other Fidelity funds that also have underlying expense ratios.  Therefore, you are paying .60% for the “convenience” of a pre-packaged asset allocation of other mutual funds based on some expected retirement date.  But is it really worth it?

Comparing an Alternative

At Bolmgren RetirePLAN, we offer a no strings attached 401k or IRA review for $75.00.  This includes a suggested allocation customized to not only your age and retirement date, but also you own risk tolerance.   If we compare a $75 fee with .60% expense ratio, we find a hurdle amount of $12,500.  Therefore, if you have more than $12,500 in your 401k or IRA, it would be more cost effective to have it professionally reviewed annually and pay the a the $75.

The conclusion is simple.  For new investors, target date funds offer critical asset allocation in a financial maze.  However, larger investors should consider other alternatives for a well-balanced portfolio.