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Good news for savers: Average balances on retirement accounts have peaked and nearly doubled in the last 10 years.
A good deal of 401 (k) cash accounts are found in target date funds. In fact, more than half of the 401 accounts (k) hold 100% of their assets in target date funds, according to Fidelity Investments' third quarter data. It remains to be seen if this strategy is wise.
This is the first year that more than half (50.4%) of 401 (k) savers have all their assets in a target date fund, the Boston-based financial services firm found in its third-quarter analysis quarter the retirement savings of its investors. More than 30% of the total assets of 401 (k) are in target date funds compared to 9.8% in the third quarter of 2008. Even more savers in the 403 (b) – 62% – plans all have their assets in a target -date fund, says the report.
See: Are public pensions the next retirement crisis in America?
Target date funds are investments adapted to the age and retirement years of the account holder. It is essentially a strategy of "take action and forget" because the fund will rebalance automatically to match the age of the investor. For example, a person in their thirties can be invested in a 2050 target date fund, which assumes that he will retire that year at age 67. (The target date fund assumes that you will reach retirement age during this year, for older generations this age may be younger).
"The benefit of the target date fund is that it adjusts your capital for you as you approach your retirement date," said Meghan Murphy, Vice President of Fidelity Investments. For example, a person in their 20s or 30s will be more invested in equities, which may involve more risk, and the target date portfolio will adjust to be more heavily weighted in conservative bonds and investments as this person will age.
The problem: Target date funds are not for everyone, but many employers use it as the default wallet for an employee saving in a 401 (k). Of the employers reviewed by Fidelity in its analysis, 98% use target date funds, 90% of which use it by default in the plan.
Target date funds are a great starting point, especially for new low-equity participants, said Dennis Nolte, vice president of Seacoast Investment Services in Winter Park, Florida. "These funds treat everyone as if they had the same risk tolerance and retirement income needs, and could tolerate volatility before the" target "year was reached," he said. declared.
Read: Target date funds are not enough. This strategy produces better results with little risk
According to Ryan Marshall, a partner at ELA Financial Group in Wyckoff, NJ, asset allocations can be tailored to a particular retirement year, but not to the amounts invested by individual investors. same asset allocations, which may not be favorable to them. "It's even worse when someone who is late ** saving ** for retirement may need more growth than they could receive from a target date fund," he said. he declares. "Customers like the idea of simplicity, but I'm convinced that three target date funds should be available for each date."
Look also: How to save twice your salary (or more) at age 35
Still, these investments are helpful for uncomfortable employees with investments, said Eric Roberge, financial planner and founder of Beyond Your Hammock in Boston. "Although they may not have an optimal breakdown of asset classes, they provide a quick and effective way to get people not just to save in their retirement accounts, but also to invest that money, "he said. These funds are often the default option, but savers can alter their portfolio with the alternative options offered by the employer, Murphy said. In addition, the target date funds have prevented many investors from making an extreme asset allocation, whether they are over invested in equities or not at all, she said.
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