May 17, 2018
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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Unlike Morningstar’s Jeff Holt, I would not describe the baby boomer behavior as “more conscientious.” Instead, I would use a possible synonym and describe their behavior as “more attentive,” since retirement is more imminent for them, compared to young adults. If some of these boomers had been more conscientious, careful, or thorough early in their careers, they would not feel as great of a need to increase their contributions later in their careers.
TDFs are sold on, and their expenses justified by, the premise that most 401(k) participants would otherwise find it incomprehensibly difficult to assemble a balanced portfolio from other offerings in the plan. I remember, years ago, seeing a presentation from some CREF guys pushing their TDFs (aka lifecycle funds) where they opened with a pie chart with maybe a dozen segments, mid-cap and so forth. They were going to save us from all of that. Still makes me laugh.
But – what about non-retirement TDF’s for those already retired? Are there any out there?
Many TDFs continue to follow their glide path past the target date and, at least in some qualified plans, you can find TDFs with target dates in the past, e.g., 2010.
I’m already retired. When I worked we weren’t allowed to carry-over dollars: use or loose! What can I do now where I can put away money to grow until I need to withdraw in later, later life for health care ‘tax free’ ?
Diane, the simple answer to your question is “yes.” Yes, that is, if you mean: can you buy one with your regular money – not the money in your 401(k).
Here’s what the folks at Morningstar confirmed for me:
“Investors don’t have to be in a retirement plan to buy target-date funds, although some share classes are designed for retirement plans.”
I hope this answers your question, and thank you.