The money you put into your 401(k) plan shouldn’t just sit in cash. Rather, that’s money you could be investing and putting to work.
The problem with 401(k) plans, though, is that they commonly come with a default investment option where your money will go, unless you make changes. And if you don’t make changes, you could end up stunting your savings’ growth.
Are you invested in the wrong type of 401(k) fund?
Employer-sponsored 401(k)s often default savers’ investment dollars into target-date funds. These funds are designed to balance your investments based on specific time horizons. For example, they may start out more aggressive and then get more conservative as a milestone as retirement nears.
But a target-date fund isn’t necessarily the best option for your money. Worse yet, you may not even know that you’re invested in one.
In a recent BlackRock report, more than 25% of workplace savers said they don’t know if they have money in a target-date fund or not. But that’s important information to have.
The problem with target-date funds
Target-date funds are an appropriate investment for some savers — but they’re not necessarily the best way to invest your 401(k). One big problem with target-date funds is that they often err on the side of being too conservative. That’s not a great thing if you’re trying to be aggressive in growing retirement wealth.
Recent inflation data has made it clear that retirement savers need to get aggressive when growing their money to avoid a shortfall down the line. But a target-date fund may not allow for that.
Another issue with target-date funds? Their fees can be notoriously high. And those fees may not be worth paying when you can simply load up on broad-market index funds in your 401(k) instead, which tend to charge considerably lower fees.
Do you need to make changes in your 401(k)?
If you’ve been steadily contributing to your 401(k) but have yet to actually select investments within your plan, there’s a good chance your money is sitting in a target-date fund. If that’s the case, you may want to move your money around so you’re not limited to that fund alone.
The upside of investing in target-date funds is not having to put much thought into how your 401(k) assets are allocated. But if you stick to that hands-off approach and don’t make changes, you could end up with a lot less money in retirement than what you were hoping for.
Instead of sticking to a target date, take a look at the different index funds that your 401(k) offers. You may find that you have a number of fund choices at your disposal that fit into your investment strategy.
You may even decide to put some of your money into actively managed mutual funds. Like target-date funds, these funds are known to charge higher fees. But the return you get in one of these funds might surpass the return a target-date fund will give you.
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