Kirk Hudson, 25 | New York
Current Savings Strategy: Though he’s only three years out of college, Kirk Hudson has started saving for retirement through his employer, IBM. “I’ve always contributed enough to get the maximum employer match for my 401(k),” says the financial markets consultant. “Right now, that’s 5% of my pay, around $400 a month.” Hudson made a similar contribution to a former employer’s 401(k) until switching jobs in early 2008. “I just had a few thousand dollars in there,” he says of that account, which is still active under the old plan.
At his former employer, Wachovia, Hudson directed nearly all 401(k) contributions to a target-date 2045 fund. Target-date funds typically hold multiple stock funds and bond funds. As employees approach their chosen retirement date, the mix gradually shifts from stock-laden mutual funds to more conservative bond funds. With some 36 years to go until his projected retirement date, Hudson can be a bit more aggressive, so his fund-of-funds tilts heavily toward stocks.
In late 2008, though, most target-date funds lost heavily as the stock market sank. Today, Hudson has roughly $10,000 in IBM’s 401(k) plan. In the midst of the market meltdown last year, he responded by changing his portfolio’s asset allocation so that 40% is in a stable value fund. The fund provides a market rate of interest, but no growth potential because it is unlikely to keep pace with inflation. The remaining 60% is still in the 2045 target-date fund. Hudson also has about $2,000 in his former employer’s 401(k). That money rests in a similar target-date fund.
Does Hudson’s investment strategy make sense? Says Erika Safran, CFP, principal of Financial Asset Management Corp. in New York: “I am not a fan of target-date funds. They present themselves as one-stop shopping investments, but target-date funds from various providers are not uniform in their investment allocations.” Investors need to do their homework to make sure that the fund’s composition is what they had in mind, urges Safran. “What’s more,” she says, “if a target-date fund is a collection of mutual funds, as many are, investors pay additional management fees.” That is, you might be paying fees to the underlying funds as well as to the target-date fund.