How can you help members make appropriate diversified choices ?
First and foremost , plan sponsors are expected to provide investment options that will allow plan members to invest according to their personal risk tolerance and goals . To do that , the plans may offer balanced funds as part of the lineup . The challenge with balanced funds is that the asset mix doesn ’ t materially change , which means the risk profile may be appropriate for someone at age 30 , but it won ’ t change as the member ages . The reality is that most members rarely rebalance or change their allocations over time , preferring to stick with their original allocation decision . In other words , the investment decision they make at 30 may still be in place when they are 50 .
What issues do target date funds address ?
Although not perfect , because TDF ’ s automatically become less risky over time , the fact that plan members may not pay attention to their investments doesn ’ t matter as much because the portfolio is automatically changing for them .
Interestingly , TDFs are now also a common default option in DC plans and typically garner the newest contributions .
What are the disadvantages of TDFs ?
The disadvantages of the TDF structure are that they tend to be more expensive than other options . They also assume all participants in the fund have the same risk tolerance and that the plan member does not control the asset mix .
Are TDFs the perfect solution ?
TDFs may not be a perfect solution for all plan members but they are a real step forward in simplifying the investment decision . For plan members that want a ‘ set it and forget it ’ option , TDF ’ s can really fit the bill .
For more information on what target date funds are available for your plan or to learn more about the solution , please contact your Proteus consultant .
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