If you’re choosing among the retirement funds on your 401(k) menu, you may have noticed something called a target-date fund on the list.
Target-date funds typically consist of a mix of stocks, bonds and other investments that determine their risk based on when you want to retire.
The funds are a popular choice among workers. Fifty-nine percent who have access to a 401(k) or other employer-sponsored plan said they use an automatic allocation strategy to save, according to research released earlier this year by the Transamerica Center for Retirement Studies. In contrast, 43 percent use a do-it-yourself approach.
Aaron Pottichen, senior vice president at Alliant Retirement Services, compares using target-date funds to helping his son learn how to ride a bike.
The two choices are to either let him figure it out on his own, which could make him frustrated and decide never to do it again, Pottichen said. Or, he could put the training wheels on the bike and gradually help him learn to ride.
Target-date funds offer a similar gradual approach, Pottichen said.
“A target-date fund kind of has training wheels to help people make sure they stay upright and are on the right path,” Pottichen said. “That’s how they’re beneficial.”
Despite the funds’ simplicity, there are common errors investors typically make with them.