Although, strictly speaking, cash is held in fixed income instruments, holding cash is conceptually different than holding fixed income - the duration risk is just not there. You are exposed to inflation with cash, but not too badly because one tends to reinvest regularly at a higher interest rate that reflects expected inflation. It is true that the Fed may do something weird, with ZIRP, but if that happens, you should have some time to reallocate elsewhere if necessary.
Here is the trick: do not try to call a top to the market in your retirement account. Unlike life, all that matters is where you start and where you end up, the journey is nothing. And, if you don’t screw with your allocation they you will dollar cost average. Win-win.
Also, I only know of one guy that has consistently managed his 401k allocation tactically well. He now runs a tactical allocation strategy with billions in AUM.
I agree that for the vast majority of people, target date funds are better than a lot of other things you might do.
I also think we here are in a special category. That doesn’t mean we’re better, and we may well be served better by target date funds; it’s just hard to do that and not try trading your own account without feeling at least somewhat hypocritical. If you think the risk is really high in the market right now, it’s just hard to say, well, I’m 90% equities, because this is what my target date fund does.
I second bchad’s comment. I’m very skeptical of these target date funds and a significant reason is because volatility is time-varying that may not justify very slow changes to asset allocation over time.
You have to admit they make great business sense though. They’re trying to lock in clients for life.
I’ve been reading about the impact of 401k fees on retirement balances and it’s really quite astounding how much money mutual fund fees and the like take from the ending amount. I looked a few days ago and the expense ratio for the S&P index fund thats in our 401k is like .5%. The expense ratio for SPY is .1%. wtf?!
^Hence why 401k’s can suck a lot of times. I worked at one company that only offered Class A shares of American Funds garbage. They wouldn’t even give us Class D shares. Almost six cents out of every dollar down the drain.
When I worked for the bank, on the other hand, we had awesome 401k investments. The S&P 500 index fund charged .02%. Yes, you read that right–Two basis points.
Much of it depends on how big your plan is. For very small plans
There are other things to consider too. Most mutual funds have revenue sharing components. So, when you buy the Growth Fund of America, for example, anywhere between 5-35 bps are reimbursed to the plan administrator. Now, the trick is Vanguard doesn’t have a revenue sharing component, so if you’re invested solely in index funds you’re getting a free ride. Conversely, the guy that’s all in active mutual funds is getting screwed and paying for you.
This is going to go away eventually, since it’s obviously unfair. Non-revenue sharing funds are becoming much more popular especially as the fee disclosures are becoming more transparent (new laws this year). Then it’ll fall on the employer to pay for plan administration, which may affect employer matching…in theory. Bottom line, someone has to pay for it.
For the love of god, there’s no such thing as a passive target date fund/etf. Even Vanguard has to take an active role in determining the single most important thing about a target date fund - the glide path. Fees and even the underlying funds won’t matter if the glide path is constructed poorly.
I said above that the average retail investor would be better off investing in any target date fund than doing it themselves, but we can do our due diligence!