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August 30, 2019 at 01:39 PM
Although there are many participants enrolled in defined contribution plans today that combine target-date funds with other plan investments, it’s best to be cautious when mixing target-date funds with the rest of a portfolio, according to a new Morningstar study.
“An investor who would like a more aggressive allocation would generally be better off moving along the target-date fund glide path by selecting a vintage (or target-date year) with a higher risk level than mixing the target-date fund with equity (or bond) funds from the core menu,” David Blanchett, head of retirement research at the firm, said in a new report, “Mixed Target-Date Fund Investors: Is There a Method to the Madness?”
Why do so many DC plan participants mix target-date funds? “There are likely myriad reasons,” he said, adding: “One key reason is likely because target-date funds typically appear as a single investment option (that is, a ‘black box’) on a plan website or participant statement, similar to other equity or bonds funds, and investors aren’t aware that target-date funds are actually diversified options designed to be held by themselves.”
