New 401(k) Investors Choose Target Date Funds | American Funds

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OCTOBER 17, 2016

New 401(k) Investors Choose Target Date Funds

Target date funds are getting more popular — especially among new hires.

The portion of new employees’ 401(k) dollars invested in target date funds increased from 17% in 2007 to 35% at the end of 2014, according to a recent report from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

Target date funds (TDFs) are mutual funds whose asset allocation automatically changes based on the retirement date “target” selected by the retirement saver. You choose a fund with a date that’s close to the time you plan to retire, and the fund gradually becomes more conservative as you approach that date.

While more employees overall are choosing TDFs, people working at a company two years or less, in particular, often embrace them.

What’s driving the trend? More 401(k) plans are offering target date funds: More than 70% included target date funds in their investment lineup at year-end 2014, up from 57% in 2006, according to the study. Many employers that automatically enroll workers into retirement plans are choosing target date funds as their default investment option.

And for young employees who make up a large portion of new hires, the retirement investment of choice appears to be target date funds. Six out of 10 401(k) savers in their 20s held target date funds vs. four out of 10 401(k) savers in their 60s, the study found.

“People are busy,” said Sarah Holden, ICI senior director of retirement and investor research. “Some are saying, ‘You know what? I’m going to have an asset manager handle my asset allocations. I’m going to choose a target date fund.’”

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.