Target-date funds are expected to capture a majority of 401(k) contributions by 2027, driven by their simplicity and popularity as default investments. While they offer convenience, advisors warn that they may not be suitable for all investors.
Target-date funds (TDFs) are poised to dominate 401(k) plans, potentially capturing about two-thirds of all contributions by 2027. These funds are popular for their simplicity and hands-off approach, appealing to investors who prefer a streamlined investment strategy. As of 2023, TDFs held the largest share of assets in the average 401(k) plan at 29%, a significant increase from 16% in 2014.
This trend is largely attributed to employers widely adopting TDFs as the default investment for automatically enrolled employees. While TDFs offer convenience, financial advisors caution that they may not be suitable for all investors, particularly those with complex financial needs. TDFs gradually shift from a more aggressive portfolio with a higher allocation to stocks to a more conservative one with a greater emphasis on bonds and cash as the target retirement date approaches. For example, a 35-year-old investor might choose a 2055 fund, while a 55-year-old might opt for a 2025 fund. Investors are encouraged to carefully consider their individual circumstances and investment goals before choosing TDFs as their primary 401(k) investment strategy
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