Young People Are Loading Up on Stocks
The target funds have become wildly popular because they are easy to use. By selecting a single fund, a saver can maintain a diversified portfolio that holds retirement assets for decades. Many employers believe that the introduction of target-date funds has represented a big improvement for retirement plans. Before the target funds appeared, plan participants had to choose from a menu of options, including company stock as well as stock and bond funds. Unsophisticated about the risks of investing, many participants made poor decisions, loading up on bonds or holding big stakes in risky company stock.
To ensure that plan participants have diversified portfolios, many employers encourage savers to use target funds. An increasing number of plans offer target funds as default options that are used when employees don't specify another choice. The target funds have been popular options in automatic enrollment programs. In these plans, employers automatically deduct money from paychecks and put the cash in 401(k) plans -- unless employees take the trouble to stop the contributions. Researchers argue that the automatic plans have been effective at inducing employees to save.
Although many employers have embraced the funds, the target-date portfolios came under criticism during the financial crisis. The critics noted that many funds suffered big losses. In 2008, target funds with maturity dates of 2016 to 2020 lost 29.5%, according to Morningstar. That was a painful decline, but the funds outdid the S&P 500 by 8 percentage points. "Many people did better with target-date funds than they would have done without them," says John Ameriks, a principal of Vanguard Group.
Ameriks argues that the move into target-date funds is a positive development for investors. Besides ensuring that investors have hefty stock holdings, the funds automatically rebalance assets to maintain proper diversification. That should boost returns and help investors achieve solid long-term returns.