The author is not affiliated with Zurich Insurance. The author is an independent financial planner working with employees of Zurich. The following opinions are of his own.
The Zurich 401(k) plan can be a great place to save for retirement. There is the pre-tax contribution, Roth option, tax-deferral, company match, and as of this writing 20 different mutual fund choices. You probably already know this and are actively contributing. If that's the case, kudos to you! Now you may be wondering how you should invest? Which funds should you select? After all, you need to grow your money for retirement!
Here I'll review tips I share with my Zurich clients. We manage the 401(k) for our Zurich clients through a direct link into the plan. We can swap mutual funds, change the allocation, rebalance and advise our Zurich clients on the plan. Please feel free to email me to learn more.
But for now, let's get into the target date mutual funds.
TARGET DATE FUNDS - PROS and CONS
Instant Diversification?
Target Date Funds are mutual funds where the fund gets more conservative as the target date nears. They come with dates like "2030" or "2055" and have a mix of equity index funds and sometimes bond index funds. I think most Zurich employees without a financial advisor will default to a Target Date Fund for a variety of reasons. Target date funds usually have four funds: a U.S. Stock Index, International Index, U.S. Bond Index, and an International Bond Index.
One thing to consider is the international exposure in Target Date Funds. Most Target Date Funds have a certain amount in international equities and international bonds. Is this appropriate? Don't forget Zurich Insurance trades on the Swiss Exchange, it is a global stock. Keep this in mind if you receive Zurich Stock as part of your compensation, that needs to be taken into consideration when thinking of your international equity exposure.
Too Conservative or Too Risky?
Target date funds automatically allocate more to fixed income as you get closer to the target date. Some investors will appreciate the ease of management. However, target date funds can get very conservative very quickly. For example, a Target Date 2035 Fund may own 43% U.S. stocks now, but in seven years that may shrink to only 17%! That may be too conservative for some investors.
Personally, I prefer to manage the investment mix myself. I take into consideration a client's other assets like their investment portfolio, deferred compensation plan, Social Security, or other money. You really should be looking at your overall nest egg, income needs, and develop an asset allocation from there.
Other Funds?
There may be other mutual funds available in a 401(k). Do these other mutual funds make sense for your portfolio? Target date funds may or may not include all the options available. I like to review the entire menu of funds with my clients before selecting an investment mix.
Summary
An advantage to Target Date Funds is their ease of management. However, Target Date Funds are not perfect. Some can get too conservative too soon. They also do not look at your overall retirement plan; you really should build an asset allocation based on your total nest egg and time horizon for needing the money.
Finally, they may not be as diversified as you think. Some target date funds may hold too much in international stocks and international bonds or not enough. There may also be other stand-alone mutual funds in the 401(k) not included in the target date funds worth considering.
For these reasons, my team and I do the research for our Zurich clients on the individual mutual funds in the 401(k) and build a customized portfolio of investments tailored to the client's risk tolerance and time horizon for needing the money.
Have a comment or suggestion? Email me your thoughts: Michael Aloi, CFP at maloi@sfr1.com