For most investors, Target-Date (TDFs) or Lifestyle Funds are a great idea. They reside in your 401(k) as a basket of mutual funds. Professional managers pick them and adjust risk based on your age.
The closer you are to retirement — your “target date” — the lower the stock market risk in a TDF portfolio. But not all TDFs are equal. Some are real stinkers. Now’s a good time to check if you have a problem.
Generally, high-fee TDFs will have the worst performance. Although employers are obligated to pick the best ones for your company, they don’t always do a good job — and can get sued if they keep lousy funds in your plan.
One recent lawsuit accused Allstate, the insurance company, of breaching its fiduciary duty — a federal legal obligation to pick the most prudent plan for employees.
“A former participant in the Allstate 401(k) Savings Plan has filed a lawsuit accusing fiduciaries of breaching their duties under the Employee Retirement Income Security Act (ERISA) by continuing to include allegedly poorly performing target-date funds (TDFs) on the plan’s investment menu, reports PlanAdviser.com.
How do you avoid getting stuck with under-performing TDFs? Ask your employer to “benchmark” them every year. That means comparing similar funds. There are hundreds of them on the market, so it’s not hard finding better performers.
If you’re to the task and want to do some homework, you can do some fund comparisons yourself. Morningstar rates funds on a regular basis. That’s a good place to start. If you see problems, then contact your plan administrator.