I’m trying to decide whether to invest my savings in a maintained account or a target-date retirement fund. Which do you think I should choose? — W.B.
This is simply not a decision you should get too worked up about. Going with among these investment vehicles rather than the other is not likely to produce or break your retirement. Indeed, as long as you’re making practical decisions in the rest of your retirement planning — saving enough throughout your working years, doing periodic checkups past due in your career to discover whether you have adequate methods to leave your job, etc. — you should be able to attain a reasonably secure retirement with the managed account or a target-date retirement fund.
I tell you this not only to help ease any concerns you may have about this decision, but also to make sure people whose retirement ideas don’t provide access to a managed account that they’re not operating at a serious disadvantage. The truth is that a managed account isn’t an option generally in most plans. According to a 2017 study by the Callan expenditure consulting firm, while a lot more than 90% of 401(k)s and similar ideas include target-date funds within their roster, significantly less than 40% offer managed accounts.
That said, in the event that you do have the choice between a managed account and a target-time fund, there are a few reasons you may prefer one to the other. Before I reach those reasons, however, it’s important to understand how both of these investments are identical and how they’re diverse.
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In terms of investing, both managed accounts and target funds essentially give you a secured asset allocation strategy — that is, they assist you to divvy up your assets between stocks and bonds in a manner that seeks to strike an acceptable balance between risk and return.
Target-date funds typically rely on your age in assigning you a proper stocks-bonds mix. Therefore, for example, if you’re in your 20s as well as your expected retirement time is a superb 40 roughly years away, you may choose 2055 or 2060 target-time fund, which would routinely have upwards of 90% of its resources in stocks and 10% in bonds. As you years, a target-date fund starts to gradually move considerably more of its resources toward bonds to ensure that by the time you’re retired, your stock stake may have dwindled to, say, 30% to 40%.
Not all target-date money provide someone of a specific age the same stocks-bonds mix or follow the same “glide route” in going from largely stocks to largely bonds. But the thought is to enable you to benefit from stocks’ higher long-term returns when you’re young (also if those returns might not come to be as generous as in the past) and have a good amount of period to rebound from setbacks and then shift considerably more toward bonds as you near and enter into retirement and want more stability.
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Managed accounts also give you a secured asset allocation strategy, but look at a lot more than just your age to arrive at your recommended stocks-bonds mix. For instance, if you sign up for a managed account, your 401(k) plan may provide such facts as your balance, your earnings and whether your enterprise includes a traditional pension in addition to your 401(k). All of these things make a difference the stocks-bonds allocation the maintained account recommends, and also the managed account firm’s assumptions about the performance of diverse asset classes. You may also be able to even more refine that asset allocation by giving information about your economical goals, what type of risk level you’re more comfortable with, the investments you possess outside your 401(k) so when you plan to retire.
But managed accounts in some instances can do a lot more than invest your savings. Some might be able to provide good advice or guidance that will help you determine whether you’re financially prepared to retire or assist you to decide how to pull on your nest egg in retirement. Some might provide online or cellphone access to representatives who might be able to answer questions or offer advice on specific situations.
Since a managed account can build a portfolio based on a lot more than your age and in addition provide more than simply investing advice, it could seem the obvious choice. But there’s also the matter of expense. Although the price tag on both target-date money and managed accounts may differ greatly, managed accounts are usually more expensive. According to a 2014 Government Accountability Office survey, managed accounts charge costs that range between 0.08% of assets to 1% a year in addition to the costs charged by the funds held within the managed accounts.
So according to what the managed account in your plan expenses, you will be giving up a big share of expenditure returns.
A recent Morningstar review cited stats showing that managed accounts might be able to overcome the drag of higher years with higher returns. But I don’t consider the evidence very compelling. The comparison period was relatively brief — simply five years — and the margin of outperformance was pretty slim, in regards to a quarter of a share point a year. Besides, these figures represent the average returns of several target-date funds and many managed accounts, so there is no assurance these figures will be meaningful for deciding on between the maintained accounts and target-date money of a specific plan. And whether or not they were, that doesn’t a managed account would outperform later on.
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So which should you go with? There’s no way I or anyone else can give a definitive answer to that question, but I can offer a few guidelines.
If you’re not comfortable making investment decisions on your own and your definitive goal at this stage is just to ensure that your retirement savings are being committed to a reasonable way, then a target-date retirement fund should probably be just okay. That’s especially the circumstance if your retirement account balance is relatively small, which will be true for most people just starting out.
If, however, your finances are more technical — maybe you have sizable sums found in taxable accounts and/or perhaps IRA rollovers or you are getting prepared to retire and have to draw on your nest egg in a manner that won’t deplete it too early — then a managed account could be the better choice. I say “may be” because it will rely upon what specific products and services the managed account presents and what it charges for them.
If you like the idea of a managed account nevertheless, you have to fork out anything in the neighborhood of 1% a year or more to get it, you may want to consider choosing a lower-cost target-time fund and consulting an adviser separately. Therefore, for example, if you would like help for a specific concern — say, deciding where to invest an IRA rollover or deciding when to take Social Security — as opposed to ongoing guidance, you could usually hire a economical planner willing to work for a set charge or on an hourly basis rather than paying a share of assets each year.
Finally, remember that this decision isn’t irrevocable. In the event that you go with a target-date fund and discover you’re uncomfortable using its stocks-bonds mix or you decide you would like some extra support because your financial situation is growing more technical, you can always change to a managed account.
Or if you opted for a managed account and feel you are not getting enough value for the extra costs you’re paying, you can move your savings into a target-time fund. In order to avoid disruptions in your investing strategy, you wouldn’t prefer to make such switches willy-nilly. But realizing that you’re certainly not locked in-may, if nothing else, at least consider a few of the pressure off producing a choice.