When it comes to saving for retirement, many employees feel overwhelmed by the decision-making process, especially when it involves terms like “risk,” “asset classes,” and “diversification.” For those who aren’t confident in picking investments themselves, most workplace retirement plans offer default options. But what happens when you don’t make a choice? The good news is that employers typically provide a default investment fund to make sure your money is put to work without leaving you to guess where it should go.

In this article, we’ll explore how default funds work, focusing on popular options like risk-based and target-date funds. These investments are designed to simplify your retirement planning by automatically adjusting to match your risk tolerance or retirement timeline.

What Are Default Funds?

In most retirement plans, if you don’t pick your own investments, your employer will choose for you. These default funds help remove the guesswork from investing and provide a balanced approach to managing your retirement savings. Popular choices include risk-based funds and target-date funds, both of which diversify your investments in a way that matches your personal situation.

These funds spread your money across various investment types, considering your risk preferences or your retirement age. As a result, they are often referred to as “total portfolio solutions,” meaning that your entire retirement savings should generally be invested in just one of these funds, rather than splitting them between multiple options.

Types of Default Funds

1. Risk-Based Funds

Risk-based funds are tailored to match different levels of investment risk. These funds typically fall into one of three categories: conservative, moderate, or aggressive.

• Conservative funds invest primarily in low-risk assets, focusing on stability and avoiding large losses. While the potential for growth is lower, the risk of substantial losses is minimized.
• Aggressive funds, on the other hand, are made up of higher-risk, more volatile investments. While they carry a greater chance of losing value, they also offer the potential for higher returns.

The goal of risk-based funds is to maintain a consistent risk level, so these funds are regularly rebalanced to make sure the investment mix remains aligned with the desired risk tolerance.

To help you choose the right risk-based fund for your retirement, many employers offer tools like online questionnaires. These tools assess your financial goals and risk preferences, guiding you toward a portfolio that fits your needs.

2. Target-Date Funds

Target-date funds are designed with retirement in mind, based on how many years you have left until you plan to retire. For example, if you’re 35 years old in 2024 and expect to retire at 67, you might choose a Target Date 2055 Fund. These funds are named after a specific year, and they are often created in 5- or 10-year increments, giving you the option to pick a fund that aligns with your anticipated retirement date.

The key feature of target-date funds is their time-based approach. When you’re further from retirement, the fund takes on a more aggressive investment strategy, as there’s time to recover from market fluctuations. As you get closer to retirement, the fund gradually shifts toward safer, more conservative investments to protect your savings from market downturns.

One of the advantages of target-date funds is their automatic adjustment. Unlike risk-based funds, which maintain a consistent mix, target-date funds evolve over time to ensure that the investment strategy remains suitable for your changing needs.

Why You Should Review Your Investment

While default funds are a great starting point, it’s important to review your retirement savings periodically. Over time, your financial situation or retirement goals might change, and you’ll want to ensure that your investments continue to align with your current needs.

Whether you stick with the default fund chosen by your employer or decide to make adjustments, your retirement savings is a valuable asset. A financial advisor can help you assess your investment choices and ensure that you’re on track for the future.

Taking a closer look at your retirement plan every so often ensures that your investment choices are still the best fit for your goals and risk tolerance.

Conclusion

Default funds are a practical and effective way to manage your retirement savings, offering a balanced, low-maintenance approach to investing. By selecting options like risk-based and target-date funds, you can feel confident that your investments are working toward your retirement goals. However, regular check-ins with your financial professional can help keep you on track and ensure you’re making the best choices for your future.