Studies have shown that more than 90% of all drivers rate themselves as above average. That is not surprising since every one of us who has children knows that our kids are above average. This is America and we all like to be winners. However, when it comes to managing our 401(k) accounts, most of us end up being losers.
Many studies have shown that the average 401(k) participant earns at least 2% to 3% less each year than the mutual funds in their plans. How can this be? Because so many of us give in to our emotions and chase markets higher, buying at tops. Then we get scared and sell when markets fall.
What can plan sponsors do to help participants? Vanguard recently published data from a study by Morningstar indicating that those participants who invest in
- Disciplined process. Target date fund participants are relieved of having to think of when to time their purchases or sales. Participants attempting to market time are nearly always unsuccessful.
- It's automatic. Professional management eliminates the need for participants to re-balance their accounts or modify their allocations as they age. Age appropriate allocations yield market experience more in alignment with ability to bear risk.
- Elimination of emotion. Professional managers buy and sell securities based upon their investment appeal rather than their emotional appeal.
- Always diversified. Participant account balances are always well diversified, dampening the effects of volatile market fluctuations.
A number of retirement plan experts believe that as many as 75% of all plan participants belong in target date funds. Although they may not be the perfect investment vehicles for everyone, target date funds appear to offer participants better outcomes than going it alone.
Consider including an educational element about target date funds in your next employee education session.
Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC (
