Target Date Funds are on a Roll
For the sheer simplicity they bring to 401(k) investment decisions, retirement experts have been big fans of target date funds for years.
Now, their popularity is soaring with the people who really count: employees.
Last year, 401(k) participants poured a record $70 billion into target date funds (TDFs), an investment option that automatically shifts the asset allocation in the portfolio to reduce risk as employees approach a designated retirement date. TDFs have become the first choice for people who, rather than go it alone and pick their own mutual funds, like having their employer’s mutual fund manager do it.
According to a new report by Morningstar, the Chicago research firm, the new money flowing in has averaged $66 billion annually over the past three years, a 28 percent increase over the prior three-year period. The inflows exclude new money from investment returns.
The surge in new invested money has been more about the intensity of baby boomers’ efforts to save for an impending retirement, Morningstar said, than the fact that strong returns usually pull investors into the stock and bond markets.
In another major development, TDFs invested in passive index funds are now investors’ predominate choice. This is a full reversal from a decade ago, when most TDFs were invested by stock pickers. (Although more money is now flowing into passively invested TDFs, actively managed TDFs still hold more in total assets.)
Investors of all ages are moving into TDFs, but the biggest inflows come from baby boomers in their late 50s and early 60s who’ve picked a TDF with a designated 2025 retirement date.
Boomers are doing so for two reasons. Many have hit their peak earnings levels and can contribute more to their retirement plans. Second, said Morningstar’s Jeff Holt, they are “more conscientious” – and no doubt more concerned – about preparing for their fast-approaching retirement than are young adults.
TDFs are now a permanent feature of the retirement plan landscape.
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