You can implement an asset allocation model using a single target-date fund. Most 401(k) plans offer target-date retirement funds, which accomplish two important tasks.

First, they take an investor’s money and divide it among a number of diversified mutual funds. These funds include both bond and stock investments. They generally include investments in domestic and international stocks and bonds, and in small and large companies.

Second, as an investor nears retirement, the target-date retirement fund gradually shifts the asset allocation in favor of fixed-income investments such as bonds. This reduces the volatility of the portfolio as the investor nears the time he or she will need to start to rely on the portfolio to cover living expenses in retirement.

Target-date funds are generally classified by the year in which the investor plans to retire. For example, an investor who plans to retire in about 35 years might choose the Vanguard Target Retirement 2055 fund (VFFVX). This fund invests in both a U.S. stock and international stock mutual fund, as well as both U.S. and international bond funds. Its asset allocation model today is approximately 90% stocks and 10% bonds and short-term reserves. Of course, this allocation will begin to shift in favor of bonds as we get closer to 2055.

 

Keep these three points in mind when considering target-date funds:

• Target-date fund fees can be expensive.While the target date retirement funds at Vanguard are reasonably priced, some mutual fund companies charge in excess of 50 basis points.
• Target-date funds may not be suitable for a taxable account. Because target-date retirement funds include bonds and other fixed-income investments, they may not be well suited for a taxable investment account.
• There’s no requirement to invest in a target-date fund that matches the year you plan to retire.If you prefer a different asset allocation model, you could find a target-date retirement fund that matches your model of choice, regardless of the year you plan to retire.