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.
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.
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.
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.
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.
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:
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.
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.
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.
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.