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Determining your objective

Imagine a 45-year old employee. She's in mid-career and has her 401(k) assets in a 2035 target date fund. Now imagine explaining to her what she should expect from her 401(k) as the calendar zeros in on her target year.

Do you expect her to be more concerned with protecting what she's earned over the decades, or will she be focused on maximizing her savings through investing? Your vision for her needs to be captured in your target date fund's objective.

We often think of investment objectives in terms of economic forecasts, market access or risk, but for participants it is a personal and emotional decision. The way you define your target date fund's objective will have a major impact on everything from how participants spend in retirement to the anxiety level they feel as their retirement approaches.

2010 Target Date Fund Return Spreads

Bottom Line:

Define your objective explicitly. If your goal is to help your participants preserve their accumulated savings, then you probably want less risk exposure (especially nearing retirement) than if your goal is to help them maximize every dollar invested. Keep in mind, the principal value is not guaranteed at any time, including the target date.

Action Step:

Capture your plan's objective in the Investment Policy Statement and work with your target date provider to ensure your fund matches your vision.

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Thumbnail: Target Date Funds: The Essential Guide

Target Date Funds:
The Essential Guide

Investing involves risk, including possible loss of principal.

The target date at the end of the name designates an approximate year in which an investor plans to start withdrawing money. The blend of investments in each portfolio is usually determined by an asset allocation process that seeks to maximize assets based on an investor's investment time horizon and tolerance for risk. Typically, the strategic asset mix in each portfolio systematically rebalances at varying intervals and becomes more conservative (less equity exposure) overtime as investors move closer to the target date. The principal value of the funds is not guaranteed at any time including the target date.