Participants in retirement savings plans socked money away at historic rates in 2023, according to Vanguard. Most of those contributions—64 percent—went into target-date funds.
These set-it-and-forget-it funds are mainstays of retirement plans, whether you invest through a workplace plan, such as a 401(k) or 403(b), or independently. You make a single decision—pick the fund with the target year that’s closest to the time you plan to retire—and investment experts handle everything else.
They decide how much to invest in stocks, bonds and other assets; which funds to buy; and whether you need to beef up your exposure to emerging-markets stocks or shrink your government-bond holdings. And with every passing year, they adjust the holdings to a more conservative mix as you age.
The knock on these funds is that only your age is factored into the equation. Other considerations, such as your tolerance for risk, how much you’ve saved already and whether you have a pension, get no attention. Even so, if you’re struggling with how to invest your retirement savings, target-date funds are an easy and solid option. “It’s better than not investing at all or trying to do it yourself if it’s not your passion or your area of expertise,” says Eric Figueroa, an adviser at Hesperian Wealth in Folsom, California.
On the outside, target-date funds make investing look effortless, but there’s a lot happening beneath the surface. Yet fees remain fairly low. U.S. target-date mutual funds have an average expense ratio of 0.68 percent. By contrast, U.S. stock funds have an average expense ratio of 1.04 percent; taxable bond mutual funds, 0.83 percent.
Diversification along the target-date “glide path”—the shift in the mix of assets in each fund over time—continues to evolve.
Also, two new varieties of target-date funds may arrive soon in your 401(k) plan. Personalized target-date funds, for example, will move beyond age-only considerations and customize a glide path just for you based on your age, salary, account balance, savings rate and employer contribution. Capital Group and Pimco offer bespoke target-date funds (and later this fall, so will T. Rowe Price) for employees at a handful of companies.
For now, large firms that offer a pension are most interested in these products, says T. Rowe Price’s Wyatt Lee, head of target-date strategies. “They want a glide path that’s tailored to their employees’ situation,” which they view as different from that of the broad population.
Another emerging type of target-date fund helps investors with spending in retirement. These strategies incorporate an annuity into the asset mix at some point along the glide path to offer steady income in retirement. Ten fund firms have launched a target-date fund with the option of guaranteed income, according to Morningstar.
