Overwhelmed by investment choices or too busy to manage your portfolio? These investment funds can help.
Teachers’ schedules are busy enough without having to deal with complicated investment strategies.
Indeed, trying to find the best time to jump into the market, chasing after the latest hot investments or panic-selling when stocks become volatile often leads to lower returns in the long run.
Fortunately, teachers usually have two investment options in their workplace retirement plans—index funds and target-date funds—that make it easier to create a diversified portfolio and achieve their savings goals.
“Those are the key building blocks that people should look to if they are looking at their retirement plans,” says Christine Benz, director of personal finance and retirement planning for Morningstar, an investment research firm. “That can be the starting and ending point for so many investors.”
Here’s what you need to know about these two options and how to make the most of them:
What Are Index Funds and How Do They Work?
An index fund seeks to replicate the performance of a benchmark, such as the S&P 500 Index or the Nasdaq Composite, by mimicking its composition. The fund only switches up its holdings when the index itself makes changes, which isn’t often. So, if you invest in an S&P 500 Index fund, for example, your returns (minus fund fees) should closely mirror the benchmark.
“The nice thing about index funds is they are not complicated,” Benz says. “What you see is what you get.”
Index funds have become a staple in many educators’ retirement plans—and no wonder. They’re simple. They provide diversification by giving investors exposure to hundreds or even thousands of securities that make up the particular index. Their fees tend to be lower than those charged by “actively managed” funds, in which professional managers regularly trade securities to try to beat a benchmark. And low fees are a key reason why index funds tend to outperform most actively managed funds.
How to Choose the Right Index Funds for Your Retirement Plan
The most popular index funds imitate the widely watched S&P 500 Index, which gauges the stock performance of the 500 largest U.S. publicly traded companies.
Others mimic broader indexes tracking the performance of the total U.S. stock or bond markets. And some funds have a narrower focus, such as small- or mid-sized companies, growth or value stocks or certain sectors like energy, healthcare and technology. You can also find funds that track the stock and bond market indexes of different regions in the world or specific countries, including Brazil, Germany, Japan and the United Kingdom.
Your retirement plan may not offer such a wide array of index funds, but you don’t need many to create a well-diversified portfolio. In fact, because many index funds hold some of the same securities, owning lots of index funds doesn’t necessarily add much to diversification.
Morningstar’s Benz says you can be well-diversified with as little as three index funds that provide broad exposure to U.S. stocks, international stocks and bonds. “Those core building blocks will give you almost complete market exposure,” Benz says.
Tips for Investing in Index Funds Based on Your Retirement Timeline
Even though index funds simplify investing, you’ll still need to determine your asset allocation— the proportion of stocks, bonds and cash in your overall portfolio—based on when you’ll need the money and how much risk you can comfortably handle.
Stocks outperform bonds in the long run but can be volatile in the short-term. Bonds provide stability along with some growth and income.
Younger teachers saving for retirement can risk investing more heavily in stocks for potentially greater returns because they have time to recover from market downturns. Older educators also need some stocks for growth, but holding bonds as well can lessen the impact of stock market losses as retirement approaches.
One asset allocation guideline is to subtract your age from 110 or 120 to determine what percentage of your portfolio should be in stocks. For instance, stock index funds might make up 55% to 65% of a 55-year-old’s portfolio and 85% to 95% of a 25-year-old’s portfolio.
Review your portfolio allocation annually to make sure it hasn’t veered far off track. For example, say your target allocation is 70% stock index funds and 30% bond index funds. But after a strong year in stocks, it’s now 80% stock funds and 20% bond funds. That makes your portfolio riskier than you intended. You’ll need to rebalance—sell a portion of your stock funds and reinvest the proceeds in bond funds—to get back to your original asset allocation.
If in your annual review, your asset allocation is five to 10 percentage points off target, it’s time to rebalance, Benz says.
New to investing? Build your foundation with key concepts every educator should know. Explore the basics of investing to better understand how index and target-date funds can support your long-term goals.
What Are Target-Date Funds and Why They’re Ideal for Educators
These one-and-done funds make investing for retirement even more hands-off. That’s why they are well-suited for busy teachers.
You simply choose a fund with the year in its name closest to the time you plan to retire, say target date 2030 or target date 2065. A professional manager does the rest, from choosing the investments and asset allocation to rebalancing and gradually shifting the fund’s holdings to be more conservative as your retirement nears.
Target-date funds are the “single biggest homerun from the financial services industry over the past several decades,” Benz says. “They take investors by the hand and say, ‘We understand you’re not steeped in this stuff. We’ll just put it together for you.’”
And to workers, Benz says, “Your only obligation is to keep making contributions. You don’t have any ongoing oversight, which is great because people are busy.”
Why One Target-Date Fund Is Often Enough
Target-date funds are designed so you need only one. Still, many workers divide their money into several target-date funds, throwing off the professionally designed asset allocation. By doing so, these workers could end up with a portfolio that’s too aggressive or too conservative for them.
Understanding Glide Paths in Target-Date Funds
All target-date funds have a glide path, which is how their mix of stocks and bonds changes over time. For example, a target-date fund for 25-year-olds may consist of 90% stocks and 10% bonds but gradually shift to 60% stocks and 40% bonds by the time they reach retirement age.
While many target-date funds have similar glide paths during an employee’s career, they can diverge as retirement approaches, Benz says. Some funds have a “to” glide path that continues to change the asset allocation up to the target date and then remains static. Others have a “through” glide path that will keep adjusting the mix of assets beyond the target date. Older teachers, in particular, should review a fund’s glide path to see if it fits with how they plan to use their money in retirement, Benz says.
Saving for a retirement that may last decades can be daunting. But index funds and target-date funds are two investment options that can simplify your savings and help make building your nest egg easier.
Planning for retirement? Explore NEA Retirement solutions to find resources and guidance that can help you build a retirement savings plan tailored to your goals.
Disclosure
The NEA Retirement Program (“NEA Program”) provides investment products for retirement plans sponsored by school districts and other employers of NEA members and individual retirement accounts established by NEA members. Security Distributors and certain of its affiliates (collectively, “Security Benefit”) make these products available to plans and accounts pursuant to an agreement with NEA Member Benefits (“MB”), which markets the NEA Program. Security Benefit has the exclusive right to offer the products directly or through other authorized broker/dealers, and MB in marketing the NEA Program generally may not enter into arrangements with other providers of similar investment programs or otherwise promote to NEA members or their employees any investment products that compete with the NEA Program products.
Security Benefit pays an annual fee to NEA MB for the exclusive right to offer the products in the NEA Retirement Program and to provide marketing, advisory, fiduciary and other services to NEA Members and for the NEA Retirement Program. In 2024 the annual fee amounted to approximately $4 million. Receipt of the annual fee creates a potential conflict of interest and gives NEA MB an incentive to partner with Security Benefit to make the Program available to NEA Members. To address this conflict, NEA MB conducts extensive on-going due diligence on Security Benefit to ensure that NEA Members benefit from the products and services offered by Security Benefit. NEA MB also discloses this relationship to NEA members in educational, marketing and promotional materials. You may wish to take into account this arrangement and any possible conflict of interest when considering and evaluating any communications or recommendations relating to NEA Retirement products.
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