One Approach To Rational Retirement Plan Investment Allocations

Default Choices

Saving for retirement is a harrowing enterprise. We all suffered the financial crisis and hope another is not baked into the policies of the last eight years. During that period many of us experienced breathtaking reverses in our 401K accumulations. Many folks with defined contribution retirement plans have simply opted to accept a plan’s default mutual fund option and then leave it on autopilot. In my employer’s plan, one of the funds on offer for folks in my age bracket was the target date fund, Fidelity Freedom 2020.  Here is Fidelity’s description of the retirement fund, FFFDX.

As Investopedia reports “…Target retirement funds are designed to be the only investment vehicles that an investor uses to save for retirement…”

Well, during the financial crisis period, from April 1, 2008 to mid-March 2009, the “designed for retirement accounts” fund, FFFDX, declined in value by over 40%. Basically all the gains accrued over nearly the previous 5 years in the retirement plans of many individuals invested in this default option, had been wiped out.

I often heard that it’s best to stay the course – things will mean-revert and eventually get back to an historical trend line. And as I’ve also been told, the market and valuations can be irrational longer than I have patience or capital to withstand it. Emotions are very strong and can motivate us to do things that rationally we may think are incorrect. In my case, the appeal of immediate pain relief has overcome better judgement on more than one occasion. There are several moves I’d like be able to take back. In the heat of a 40% reduction in one’s retirement balance, and with the media shouting that “this time it’s different” – there may not be many who could face the situation without blinking – and selling, at just the wrong time. Folks invested in FFFDX during this time faced the then current reality of over 40% losses and had to deal with it emotionally.

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