Some 40 million Americans have put at least part of their retirement money in these funds. And yet many investors are still in the dark about them.
By Bailey McCann, Sept. 3, 2021 10:00 am ET
For investors who want a “set it and forget it” retirement account, target-date funds have been the go-to solution.
An estimated 40 million Americans have put at least part of their retirement money in target-date funds since they first started hitting the market in the early ’90s. The amount of money in target-date mutual funds and exchange-traded funds—whose mix of stocks and bonds go from riskier to more conservative over time—has now reached $1.746 trillion. If you have a 401(k) or other retirement account that invests in the market, chances are that some of your money is in a target-date fund.
But many investors are in the dark about target-date funds—how they work, how much they cost, whether there are risks.
At the same time, some members of Congress have questioned whether these funds are worth it for investors. In May, members of the House Committee on Education and Labor as well as the Senate Committee on Health, Education, Labor and Pensions requested that the Government Accountability Office investigate target-date funds.
What is in these funds, and why are they being scrutinized? Here’s what you need to know.
How do the funds work?
Typically, target-date funds include a mix of stock funds and bond funds. These can be either actively managed mutual funds or index funds (and there are also target funds in the form of collective investment trusts—low-cost investment vehicles that use strategies similar to mutual funds). The exact mix of stocks and bonds is partly based on an investor’s age when they enter the fund and partly on when the investor plans to retire. Target-date funds create what is called a “glide path” based on this information.
Generally speaking, the glide path is designed so that the portfolio is growth-oriented during an individual’s prime earning years and then shifts to a focus on capital preservation the closer someone gets to retirement—the “target” year. (That target year will usually be part of the fund’s name. A fund with 2022 in its name, for example, is geared for someone retiring next year.)