So, you don't even have a clue on how your 401(k) is invested? Really, your motto is set it and forget it?
You're far from alone. For the first time, more than half of all 401(k) accounts, or 50.4 percent, now hold all of their retirement savings in a set-it-and-forget-it target-date fund – a collection of ready-mixed investments selected based on the year you'd expect to retire, according to a tally of 401(k) accounts at Fidelity Investments.
The mix of stocks and bonds are automatically readjusted based on the year that's closest to your expected date of retirement. The mix trends more toward bonds than stocks as you age.
A trillion dollars in a targeted mix
Assets in target-date funds hit $1 trillion in 2017 – up from a mere $158 billion at the end of 2008, according to Morningstar's latest annual report on what it called the "Increasingly Passive Giant."
Younger savers are even more dependent on this hey-you-do-it-for-me hack.
About 68 percent of millennials on Fidelity's 401(k) platform have all of their money in the plan invested in a prepackaged target-date fund. That means many may have never, ever made a decision on how much money to put into international funds, growth funds, value funds, junk bonds or anything else.
How can that many people simply ignore how they're saving their money in a 401(k)? Well, it's not as shocking as one might think.
We're looking at the default pick for the vast majority of 401(k) plans – especially among plans that automatically enroll new employees. So if your company automatically enrolls you in its 401(k) plan – and you don't select how to invest the money – then the default is a target-date fund based on your age.
"What that results in is a large number of people being defaulted in target-date funds," said Christopher Jones, chief investment officer for Financial Engines.
Jones said the target-date funds aren't necessarily a bad idea for younger workers in their mid-20s or 30s. After all, someone who is decades from retirement has plenty of room to take risk and doesn't want that money parked in a low-risk, low-return money market fund or a stable value fund.
Millennials are making money
More good news for millennials: The average balance for millennials who have been in their plan for five years in a row hit $82,000 in the third quarter, according to Fidelity's data. That compares with $26,600 for millennials overall.
The average age for millennials with those higher balances and five years in a plan was 33.5 years old. About 45.8 percent of that group had all of their money in a target-date fund.
One key factor in success for millennials: They keep saving money each year. The average 12-month contribution amount was $6,940 for those who were five years in the plan. That compares with generally younger millennials who contributed an average of $4,520 a year.
"They're making an effort each year to stay in the plans," said Katie Taylor, vice president of thought leadership at Fidelity.
Many millennials who hold larger balances in their 401(k) plans, she said, tend to have a higher-than-average income.
Millennials in that group with an average of $82,000 in their 401(k) plans had an average income of $92,000. That compared with an average income of $74,900 for millennial savers overall, according to Fidelity.
When it comes to building up sizable savings for retirement, employees who do well often benefit from being able stay with one employer for several years, receiving a good company match on their contributions and aiming to save more than 10 percent of their pay, Jones said.
For example, Fidelity noted the average balance for all workers who have been in their 401(k) plan for five years straight reached $221,000 in the third quarter. The average balance for workers who have been in their plan for 10 years reached $305,400.
One mistake to avoid: Too often, an employee who leaves a company to change jobs will cash out of the 401(k) and take the tax hit.
"They'll just go out and spend it," he said.
All target-date funds are not the same
Younger savers who invest in target-date funds have no doubt gotten a boost from the strong bull market for stocks. The basket of funds generally carries more domestic and international stocks when you're in your 20s or 30s than if you're in your 60s.
Say you planned to retire in 30 years. The Fidelity Freedom Fund 2050 would have a mix of 63 percent domestic stock funds, 27 percent international equity funds and 10 percent bond fund.
Say you planned to retire in five years. The Fidelity Freedom Fund 2025 would have a mix of 42 percent domestic stock funds, 18 percent international equity funds, 36 percent bond funds and 3 percent short-term funds.
But there are reasons to think twice about investing blindly:
- All target-date funds don't take on the same level of risk, even for people of the same age.
- While fees have been trending down, some target-date funds have way higher fees than others.
- And if you've got a lifetime of savings on the line, you might want more control over your investments as you near retirement. You also may have other financial challenges, as you age, where you'd want to consider a more conservative or more aggressive portfolio.
Granted, the bulk of the money in 401(k) plans is not in target-date funds. Just over 30 percent of all 401(k) assets are in target-date funds, according to Fidelity. That's up from 9.8 percent of overall assets 10 years ago.
Watch your fees
Cost, of course, is key as you're trying to save money toward retirement. The least expensive option, generally, can be a target-date series that invests primarily in index funds, according to Morningstar.
The average asset-weighted expense ratio for target-date funds fell to 0.66 percent at the end of 2017, a notable decrease from 0.91 percent just five years earlier, according to Morningstar.
Watch your risk
Risk is another issue. Sometimes, the investment community is more bearish on certain pieces in the target-date mix, such as the worries about a weak global economy, a trade war and the impact on international funds. Or fear of rapidly rising interest rates would make some more bearish on some bond funds.
But your money would continue to be invested in those areas based on your target date of retirement.
Performance matters, as well. The Morningstar report noted that while some newer lower-cost target-date offerings have been popular, some have not produced better performance results than older, more-costly target-date funds.
The Pension Protection Act of 2006 enabled employers to make it easier for workers to enroll in 401(k) plans by doing it for them. Many times, employees don't opt out when you opt in for them. The act also gave the green light to the use of target-date funds as a qualified default investment.
At the end of the third quarter, about 34 percent of Fidelity plans had an auto enrollment feature – more than double the percentage than 10 years ago.
Giving more proof to the auto-enrollment twist, Fidelity notes that 51 percent of all "new" 401(k) contributions go into a target-date fund.
Vanguard ranks No. 1 with $381.5 billion in total assets in target-date funds in 2017; Fidelity ranked No. 2 with $227.5 billion in total assets in target-date funds, according to Morningstar. David Blanchett, head of retirement research for Morningstar Investment Management in Chicago, said target-date funds are an improvement for many savers who struggled with building their own portfolio.
"They significantly simplify the investment decision process and I think will definitely result in better retirement outcomes for investors," Blanchett said.
Yet he warns that target-date funds aren't a perfect solution because individuals face their own challenges and preferences.
Not paying attention may mean you're taking on more risk than you're prepared to take.
Contact Susan Tompor: firstname.lastname@example.org or 313-222-8876. Follow Susan on Twitter @Tompor
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