BUZ LIVINGSTON: Investors dazed and confused?

Published: Saturday, August 24, 2013 at 03:02 PM.

According to Charles Schwab more than half of 401(k) investors struggle with their investment options and see 401(k) selections more confusing than health care choices. Retirement planning decisions even caused stress for one-third of those surveyed. Marketwatch.com’s Andrea Coombes read the review and posted “401(k) Savers Are Confused and Stressed.”

Immediately, the financial blogosphere and Twitter buzzed with Led Zeppelin “Dazed and Confused” references.  Let the Walton Sun break the news — Jake Holmes, not Zeppelin guitarist Jimmy Page, wrote “Dazed and Confused.”  

Let’s clear up something.

Group health insurance options pose few problems unless you get sick and corporate accountants decide to play God and count pills. America is the only place in the industrialized world where health costs can cause bankruptcy. Astonishingly, over three-fourths of medical bankruptcy filers had health insurance prior to their illness. Don’t be naïve: The doctor’s office likely has no idea what your insurance company will cover when they send you the bill.

To alleviate investment anxiety, Coombes recommends buying a target date fund to coincide with your expected retirement. Target date funds (TDF) aim to match your retirement date with their portfolio by owning fewer stocks, hence becoming less aggressive, as retirement looms.

This strategy has several problems. First the stock allocation varies with each mutual fund company. Vanguard, Fidelity, and T. Rowe Price 2025’s TDFs own 70 percent, 60 percent and 75 percent stocks respectively. How funds will change their portfolios over time varies, too. More importantly the TDF for your expected retirement date may be more aggressive than your risk tolerance.

We recommend clients use TDFs, if available, but to make sure the target date matches their risk tolerance. Investments inside a TDF will change so regular reviews are critical. One frequent mistake we see is a target date fund mixed with other investments — usually the one that did better last year. Chasing returns does not work, rather have a strategy and stick with it. Target date funds get a lot of grief but they have one good point — simplicity. If a saver chooses an appropriate target date fund some 401(k) confusion vanishes.

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