The Rise of Target-Date Funds for Your 401(k)
Target-date funds have become the go-to choice for many 401(k) participants looking to streamline their retirement savings. As of 2023, around 29% of assets in the average 401(k) plan were invested in these funds, a significant increase from just 16% in 2014. By 2027, experts predict that target-date funds will receive about 66% of all 401(k) contributions, with roughly 46% of total 401(k) assets being held in these funds.
The popularity of target-date funds can be attributed to employers adopting them as the default investment option for automatically enrolled workers. While these funds offer benefits for many investors, they may not be suitable for everyone, according to financial advisors.
How Target-Date Funds Work
Financial experts recommend that investors adjust their investment portfolios as they age, moving from riskier assets like stocks to more stable ones like bonds. Target-date funds automate this process based on the investor’s expected retirement year. For instance, a 35-year-old planning to retire in 30 years might choose a 2055 fund, while a 55-year-old might opt for a 2035 fund.
A One-Stop Shop for 401(k) Savers
Advocates praise the simplicity of target-date funds, offering a convenient all-in-one solution for 401(k) savers who may lack the time or expertise to manage a customized portfolio. By delegating important decisions like asset allocation to the fund managers, target-date funds provide cost-effective investment advice for individuals who prefer simplicity and convenience.
Drawbacks of Target-Date Funds
While target-date funds have their benefits, they may not be suitable for all investors. Some individuals with substantial savings outside their 401(k) plan or those seeking a more hands-on approach may find these funds limiting. Different asset managers have varying investment philosophies, and the funds offered by employers may not align with every investor’s risk profile.
Despite these limitations, target-date funds can help inexperienced investors create a balanced portfolio based on their life stage. Ultimately, the decision to invest in these funds depends on individual preferences and financial goals.