HR professionals know that retirement benefits are the cornerstone of a strong employee recruitment and retention strategy. But helping employees construct a 401k portfolio is a complicated task.
Large caps, small caps, international, fixed income, growth and value oriented funds – these are just some of the choices an employee has to make when picking among a company’s 401k fund options. Participants also must decide how much exposure is appropriate, given their age and risk tolerance. They have to think about how to re-balance and re-allocate their funds as they age.
In short, it’s complicated. But does it need to be?
There is not one fund in any 401k lineup an advisor would suggest a participant use as their sole investment, except for one – the target-date retirement fund, also called a TDF.
What’s a target-date retirement fund?
A TDF is a fund that corresponds to the year an employee plans to retire. It offers a mix of stocks, bonds, and other assets, and provides automatic age-based balancing that shifts portfolio risk to more conservative funds as the employee gets older.
- Employees in TDF’s have higher returns with lower volatility than those who use a core menu of funds.
- On average, participants will choose only 3.1 funds, regardless of whether the plan offers 10 or 50 funds – resulting in a portfolio that is not diversified in all the major asset classes.
- 90% of plan participants never change their investments once they join their employer-sponsored plan – making their allocation stray from their original strategy.
When viewed broadly, the employee population is not generally sophisticated about how to build a portfolio and make investments. Perhaps it is time we come to the realization that no number of employee education meetings will turn the average worker into an effective retirement investor. Since investment-related education and related materials are completely optional, they are incredibly underutilized.
Choosing a target-date fund is but one step in the process securing a comfortable retirement for the everyday worker.
Far harder than choosing a retirement vehicle is taking enough current income and locking it away in a retirement account. A target-date fund eliminates much of the guesswork, allowing plan sponsors to focus on developing effective methods to target this hurdle, rather than spending resources on educational materials that are often neglected.