I was talking with a young couple the other week regarding their retirement investment selection in their 401(k) plan. They both had selected choices based upon their retirement age. They will hit that age in 2050. If you aren’t retiring for 30 years, that might seem like a good choice.

But what does that year really mean when it comes to investing for retirement? This type of investment approach is typically referred to as a target-date strategy. I gave the couple a risk tolerance questionnaire. (It is considered malpractice, by the way, for a registered investment advisor not to have clients complete a risk tolerance questionnaire prior to doing any investing.) In this case I was doing it only for the purpose of their retirement planning.

They both scored in the moderate range for risk tolerance. However, that is not the risk tolerance their target-date mutual fund is currently operating on. Let’s take a deeper dive into these strategies.

401(k) plan and 403(b) plan default choices

The responsible plan fiduciaries of your 401(k) or 403(b) plan can choose to offer a qualified default investment alternative (QDIA) in an effort to help employees make better diversified portfolio investment decisions. Many people find that in the rush of their employer’s on-boarding process, they do not spend much time thinking about their retirement choices. In addition, I think the naming of target-date funds has made them the most popular choice.

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