If you want to set yourself up with plenty of money during retirement, you'll need to commit to saving for that milestone consistently throughout your career. And if you have an employer that offers a 401(k) plan, you may want to sign up to participate in it.
The benefit of participating in a 401(k) is that contributions are taken as payroll deductions. This means that it's not your responsibility to transfer funds to your 401(k) plan every month. Rather, that will happen automatically, making it easier to stay on track.
Image source: Getty Images.
Many employers that sponsor 401(k)s also match worker contributions, to some degree. So participating in an employer plan could mean snagging some free money for your retirement.
Your goal in funding a 401(k) is to see your balance grow over time. But if you're not seeing the growth you were hoping for, it may be due to the way your 401(k) is invested.
Is all of your money in a target date fund?
One drawback to saving for retirement in a 401(k) is that these plans generally don't make it possible to invest in individual stocks. Rather, 401(k)s tend to limit you to specific funds. And some of those funds may not be conducive to meeting your savings goals, due to the way they're invested and the fees they charge.
Target date funds are often guilty on both counts.
A target date fund has an asset mix that adjusts as different milestones are near. In the case of a 401(k), a target date fund will generally begin with a higher risk profile for stronger returns but scale back in that regard as retirement nears.
It's common for a target date fund to be the default option for investing in a 401(k). So if you don't actively choose your own 401(k) investments, your money will often land in a target date fund. And that's not necessarily what you want.
Not only do these funds tend to charge hefty fees, but they also tend to err on the side of investing conservatively. If you're unhappy with your 401(k)'s growth, it may be because you never actually selected investments, but rather, allowed your money to sit in a target date fund all this time.
Another option to consider
Target date funds can be pretty good investments for people who prefer to take a "set it and forget it" approach to retirement savings. But that approach isn't necessarily going to work out well for you financially. Rather than keep all of your money in a target date fund, look at index funds as an alternative.
You'll commonly find index funds as an option within a 401(k). What makes them appealing is that they're passively managed. Because of this, their fees tend to be minimal. And you may find that moving your money into an index fund results in stronger returns than a target date fund.
Of course, that's not guaranteed, and you'll need to review your plan's index fund choices carefully before making a switch. But either way, be aware that target date funds have their drawbacks and sticking to one could mean ending up with a 401(k) balance you're less than thrilled with.
