Should You Keep Your Entire 401(k) in a Target-Date Fund?

If you have a retirement fund known as a 401(k), you might have heard of target-date funds. Investors commonly store your money from your 401(k) in a target-date fund, because they’re designed to reach a goal on a specific timeline, hence the name “target-date.” The funds invest in riskier stocks at first, then investors transfer them over to less risky ones later on to ensure you meet your retirement goals.

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The nice thing about having an investor manage your money in a target-date fund is that you really don’t have to do anything. Once you’ve opted for a target-date fund investment, investors take it from there and optimize your stocks based on the retirement date you give them.

This strategy of investing in the target-date fund might seem sound, but is it really the best place to invest all of the money in your 401(k)? After all, your 401(k) will likely have hundreds of thousands of dollars in it by the time you retire. Would it be better invested in multiple funds, or is it best to just keep it easy in a target-date fund? GOBankingRates spoke to experts to find out what really is the best plan.

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Justin Albertynas, the CEO of Ratepunk, said that many people are intrigued by the seemingly simple strategy of the target-date funds. “One doesn’t need to be a stock market aficionado to grasp their workings. They manage risks, shift allocations and effectively diversify the investments.”

But part of having a really solid investment strategy is knowing when to adjust your investments. “No single investment strategy can claim a one-size-fits-all solution. While these funds are relatively hassle-free, they might not offer the tailor-made investment path that some seasoned investors might be seeking,” Albertynas said.

David Rosenstrock, director and founder at Wharton Wealth Planning, added that since target-date funds contain multiple funds, one of them could be pulling your investment down, but you don’t have the power to adjust your investment accordingly, since all of the funds are grouped together.

“Target dates don’t allow you to separate different categories of investments — value stocks, growth stocks, bonds, etc.,” he said. “So in essence, you can’t withdraw from investments that are doing well in certain years and avoid withdrawing from investments that are doing poorly in those same years.” There isn’t a ton of customization available once you’ve set up your target-date fund investment.

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Think About Diversifying Your Portfolio

Instead of keeping all of your cash in a target-date fund, Albertynas recommends spreading your money around. “On considering alternatives, 401(k) plan holders can look into index funds, which track segments of the market, or individual stocks. These can provide specific exposure to certain sectors and can be more aggressive or conservative based on an investor’s preferences. Another option is considering bonds or real estate funds, which offer a different kind of asset diversification.”

Sometimes, your employer will even offer other methods of investing your money. They may offer bonds, alternative stock funds, real estate investment trusts (REITs) and the company’s stock options. Reach out to your HR department to see what’s available to you as an employee to augment your 401(k) investments.

Assess Your Goals Before Making Any Changes

The beauty of target-date funds is that they are very convenient for the person who isn’t interested in getting more in the weeds of investing. Eliza Arnold, the founder of 401(k) provider Arnie, said there are many advantages to keeping your cash in a target-date fund.

“The automatic rebalancing eliminates the need for the investor to constantly monitor and adjust their holdings. Additionally, these funds often come with professional management, meaning experts are overseeing the asset allocation and making decisions on the investor’s behalf.” Arnold added that target-date funds simplify your decision making, so if you don’t want to think anymore about your investments, you don’t have to.

If you want to get more involved with your investing and make customized choices based on your needs, Sean Lovison, the founder and lead planner at Purpose Built Financial Services, LLC, said it could still be a good idea to save up some money in the target-date fund first before diversifying.

“Everyone’s situation is different,” Lovison said, “but these funds might be suitable for the first $200,000-$300,000 of savings before shifting to a more personalized portfolio. Ultimately, choosing between a target-date fund and other investment options should align with your long-term goals and risk tolerance.”

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This article originally appeared on Should You Keep Your Entire 401(k) in a Target-Date Fund?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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