The “American’s preferred retirement savings tool” has just reached a new height.
Target-date fund assets soared to a record $4 trillion in 2024, according to Morningstar’s new “Target-date Fund Landscape” report.
“It’s a huge number and it may be hard for people to catch the scale of that,” Janet Yang Rohr, director of multi-asset and alternative strategy at Morningstar, told Yahoo Finance.
"These funds are basically the preferred retirement savings tool for Americans. When these funds started, about 15 years ago, these funds weren't actually obvious, and these funds would be as important as they were."
Now, almost all 401(k) plan sponsors and most state automatic IRA plans use target dates when automatically integrating workers into retirement plans. In fact, their dominance stems in many ways from the default state of new contributors to the 401(k) plan.
“Retirement plan sponsors and governments have taken confidence in (target date funds) and allowed these to be the default investments for many retirement plans,” Roll said. “In doing so, funds are basically pouring into these funds and they have performed very well with investors.
“It’s a win-win situation for everyone.”
Read more: How much should I contribute to 401(k)?
With the Target Date Pension Fund, you can choose the year you want to retire and purchase a mutual fund in the name of that year (e.g. Target 2044). The fund manager then allocates your investment between stocks and bonds, usually composed of index funds, which adjusts to a more conservative combination as the target date approaches.
Many people just choose the year they will be the bulls and they will reach the full Social Security retirement age. For most of us, that is 67 years old. If you have higher risk tolerance, you may have a more aggressive mix on a later date, which means higher stock exposure, or if you are conservative, you can use earlier stocks.
Read more: What are the retirement ages for social security, 401(k) and IRA withdrawals?
The cost of holding a target date mutual fund portfolio of principally index funds is lower than the cost of active management. According to MorningStar data, their average expense ratio is 0.26%, while the average expense ratio for mainly active target date funds is 0.79%, and the average expense ratio for using the mixture is 0.79%. (Vanguard's popular S&P 500 S&P 500 tracking index fund, on the other hand, has a fee ratio of only 0.04%.)
Any questions about retirement? Personal finance? Is there anything related to career? Click here to drop Kerry Hannon's notes.
Expenses include management, marketing, sales and other costs, deducted from your return on investment. For most of us, it's probably a price worth paying.
David Stinnett, director of strategic retirement consulting at Vanguard, told Yahoo Finance: “The target date fund helps 401(k) participants make investments that are appropriate for age allocation and automatically rebalanced.”
Savers “can feel at ease browsing uncertain markets in uncertain markets because they know that their portfolios have good changes in both the bourgeoisie and across asset classes and are built for long-term investment goals like retirement – in many cases, there is no need to raise your finger,” he said.
Rohr added that investing in target date funds is one of the easiest things you can do for yourself. "I also invest in these investments because I don't have time to change the distribution when the market changes. ”
These funds have rampant love. For example, at Vanguard, more than 8 of 10 participants in last year’s 401(k) account used the Target Date Fund. According to Vanguard’s “America Saves Save 2025” report, about two-thirds of the 2024 donations from 5 million people in the 401(k) program received the funds.
If you are one of the record numbers of Americans who fell to 65 this year, when they first entered the mainstream, invested in the 2025 fund and continued to invest in whether the market is up or down, that's done well.
As of the end of 2024, the average annual growth rate of all 2025 target date funds that exist throughout the process was 7.3%, and the average expectation for each Morningstar data exceeded the expected 6.3% over the past 15 years.
From the 2025 peak of the market on February 19 to the low on April 8, the S&P 500 (^GSPC) lost 18.6%. During this period, the average value of the target date 2025 Morning Star category lost 7.6%.
In Morningstar's model scenario, retirement account investors, aged 50 in 2010, have been employed for nearly three decades, pay about $75,000 per year, inflation of 2% per year, saving 7% per year for target date funds, and owning about $300,000 in retirement reserves.
Roll said those target funds for 2025 accomplish what they should do.
“All of this provides these investors with a good formula for success,” she said. “So, these workers are in a good place to retire now.”
Remember how you felt when you looked at the 401(k) balance a few weeks ago?
Over the past month, the discipline of investing in target date funds has been prominent.
“When you see all the volatility we’re seeing, you really see why diversification is needed,” Roll said.
According to MorningStar data, the annual loss for S&P 500 to May 7 was 3.9%, with a growth rate of 1.8% for typical target date 2025 funds and a growth rate of 1.4% for overall target date funds.
"People in these diversified funds have also seen the loss, so let's not hide it, but it's lighter and more tolerant," she said.
To be honest, diversification is not always easy for the average saver who doesn’t manage money.
"Target date funds aren't necessarily magic -- there are no magic wands here -- but the reason they work is because people use them and save them regularly," Rohr said.
Kerry Hannon is a senior columnist at Yahoo Finance. She is a professional and retirement strategist and the author of 14 books, including the upcoming “Retirement Bites: X Gen X’s Guide to Securing Your Financial Future,“ “In control over 50: How to succeed in the new world of work” and “never be too old to get rich”. Follow her Bruceky.
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