Do 'Safe' Target-Date Retirement Funds Have Hidden Risks?
Target-date mutual funds are a type of investment product that many people have started to use for their retirement portfolios. With this type of investment, you choose a target date that you would like to retire by and the mutual fund manager makes the necessary adjustments to your portfolio to become more conservative as you get closer to that date. While many consider this to be a safe form of investment, there are some potential risks involved.
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Costs
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One of the potential problems with investing in target-date funds is that they come with fees and expenses. When you buy shares of this type of fund, you may have to pay a sales load, which is like paying a commission for the broker who sold it to you. You will then also have to pay an administrative fee to the mutual fund company every year to cover the costs of running the mutual fund. Over the course of your working life, this can add up to be a significant sum of money and it comes directly out of your retirement funds.
Lack of Control
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Another potential risk with this type of retirement investment is that you have little control over what goes on with your money. You cannot control how the funds are allocated as you could with a regular retirement portfolio. You have to go with the asset allocation that is used by the rest of the investors in the target-date mutual fund. If you are uncomfortable with the allocation, you can either sell your shares or live with it.
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Poor Management
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Investing in a target a mutual fund also has the risk that comes with professional money management. With a target-date fund, you have to trust that your manager will do what's right. You simply turn your retirement funds over to a mutual fund manager who you may know little about. You trust the manager to make the right decisions with your money and to get your retirement funds ready for you while you are working. If the fund manager chooses the wrong investments or wrong allocation, you could have to work many more years than you anticipated to afford retirement.
Fosters Lack of Attention
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Another risk that comes with this type of investment is that investors mistakenly believe that their retirement is on autopilot. These funds are sold under the pretense that you can simply buy more shares as you go and everything will be fine. This leads many to make the mistake of ignoring their retirement accounts and leaving everything alone. To be successful planning for retirement, you have to regularly review your account and make sure that you are on track. If you ignore it, you could be ready to retire one day and not have enough funds to get started.
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