Yahoo Finance

Target date fund assets soared to a record high in 2024. That's according to a new Morningstar report. Yahoo Finance senior columnist, Carrie Hannon, is back with us with the story. So, Carrie, what makes these funds so popular and what did we learn from this latest report?

Yeah. Well, good morning. Uh, here's the thing, Ali. This is, these are so, it has become the retirement vehicle of choice for, for most, uh, people in 401K plans in particular because most employers now offer this as the default investment when they enroll people into their 401K plans. And so, these started about 15 years ago and they've absolutely taken off as the kind of, uh, do it yourself investing, uh, without having to lift a finger in a way. It's not exactly do it yourself, but you just kind of set these aside in the target fund, your retirement funds, and, and it automatically will readjust, uh, to keep the balance. So here's how they work. Uh, in general, uh, what the manager of this fund will do, and I will say, uh, eight and 10, uh, 401K investors through Vanguard now hold these target date funds. I mean, they're huge. No wonder the $4 trillion, right? And so what that, uh, manager does is they allocate between stocks and bonds, right? And they're usually index funds. So if you pick the date you think you're going to retire and, and I usually tell people just pick what your full retirement age might be, say it's 67. Um, and so maybe you would have a, a target 2044 fund, for example. Um, that's what you look for. And then as you near retirement, these investments become, you know, skewed to the more conservative, move towards bonds. If you feel like you're like a little more equities, then you pick, um, a later date for your target date fund. And if you want to be more conservative, you go the other direction. But what I love about these and why they're so great for many investors is like when the markets go jangly, uh, we don't sit there and worry because these are, uh, kind of balancing, diversifying your investments in a way that, so you don't have to be panicking and you know that they're going to rebalance in order to keep you focused on what the goal is. So that's why, Ali, I think these have really, uh, taken off and been a great solution for many people who kind of just like are deer in headlights when they look at what should I invest in?

So, Carrie, if you're thinking about enrolling in a target date fund, what are some of the best practices?

Yeah, I, I think it's important two things. First of all, remember, um, that yes, you may be defaulted into one of these plans or you may have selected it in your, in your retirement plan yourself. And this can be on your own through your individual IRA as well as your employer 401k or employer provided plan. But, um, look to make sure that each year you escalate how much you put in. So if you can just bump it up 1% each year, then you're continually to grow how much you are investing on a regular basis into these retirement accounts. Often, we forget to bump it up each year and, and generally it's a very good idea. Some employers are now doing that for you, but, but do try to pay attention. The second thing, Ali, is look for fees. Okay? I, I preach on this a lot, but fees can really erode the actual value of your retirement account over time. Over time, most target date funds are in index funds. So these are very low cost in general. They're a little more than a straight index fund because yes, you're paying for someone to manage that rebalancing for you so you don't have to worry about it. But some target date funds do invest in actively managed funds, not just index funds. Some do a hybrid. Those that are, those that are in the actively managed funds tend to be more expensive. So, uh, the fees are higher. So pay attention, that is an important element. Uh, and if you're selecting your own target fund, you can look inside and see what they're holding, uh, when you go to that target date fund and it will show you, uh, what percentage, what funds are they index funds or are they managed funds. And, and I tend to lean towards, uh, thinking the index funds are a good way. The lower fees, the better you can, the better for you ultimately.

That's some great advice there, Carrie Hannon. Thank you so much as always.

Thanks.