Great news for savers: Average retirement account balances have hit record highs and have almost doubled in the past 10 years.
A good deal of the money in 401(k) accounts is ending up in target-date funds. In fact, more than half of 401(k) accounts hold 100% of their assets in target-date funds, according to third-quarter data from Fidelity Investments. Whether that’s a wise strategy, however, is up for debate.
This is the first year more than half (50.4%) of 401(k) savers have all of their assets in a target-date fund, the Boston-based financial services firm found in its third quarter analysis of its investors’ retirement savings. More than 30% of overall 401(k) assets are in target-date funds, up from 9.8% in the third quarter of 2008. Even more savers in 403(b) plans — 62% — have all of their assets in a target-date fund, the report said.
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Target-date funds are investments tailored to an individual account holder’s age and retirement year. It’s essentially a “set it and forget it” strategy because the fund will automatically rebalance itself to align with the investor’s age. For example, someone in his early 30s may be invested in a 2050 target-date fund, which assumes he will retire in that year at the age of 67. (The target-date fund assumes you will be at full retirement age in that year. For older generations, that age may be younger).
“The beauty of the target-date fund is it adjusts your equity for you as you get closer to your target retirement date,” said Meghan Murphy, vice president of Fidelity Investments. So, someone in their 20s and 30s will be more heavily invested in equities, which can come with more risk, and the target-date fund portfolio will adjust to be more heavily allocated into bonds and conservative investments as that person gets older.
The problem: target-date funds aren’t for everyone, yet many employers use it as the default portfolio for an employee saving in a 401(k). Of the employers Fidelity looked at in its analysis, 98% of employers use target-date funds, 90% of which have it as the default option in the plan.
Target-date funds are a great starting point, especially for new participants with little assets in a retirement account, said Dennis Nolte, vice president of Seacoast Investment Services in Winter Park, Fla., but savers should consider alternative options as they accumulate assets. “These funds treat everyone as if they have the same risk tolerance and income needs in retirement, and can tolerate the volatility before the ‘target’ year is reached,” he said.
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Asset allocations may be tailored for a specific retirement year in mind, but not how much money individual investors have, said Ryan Marshall, partner at ELA Financial Group in Wyckoff, N.J. People earning $20,000 or $200,000 a year are lumped in the same fund with the same asset allocations, which may not work in either of their favor. “It is even worse when someone who is late at **saving** for retirement may need more growth than they would potentially receive from a target-date fund,” he said. “Clients like the idea of simplicity, but I truly believe there should be three target-date funds offered for each date.”
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Still, these investments are helpful for the employees uncomfortable with investments, said Eric Roberge, financial planner and founder of Beyond Your Hammock in Boston. “Although they may not have the optimal breakdown of asset classes, they are a great quick fix solution to get people not only saving into their retirement accounts, but investing that money,” he said. These funds are often the default option, but savers can change their portfolio with alternative options the employer has made available, Murphy said. Plus, target-date funds have prevented many investors from extreme asset allocations, either too heavily invested in equities or not at all, she said.
