(Bloomberg Business) — For a decade, a new kind of mutual fund has been taking over Americans’ retirement portfolios.
The target-date fund is designed for people with no knowledge of investing. You pick the fund closest to the year you expect to retire—the Vanguard Target Retirement 2030, for example—and the fund does the rest. Containing a variety of stock and bond funds, the all-in-one funds gradually and automatically get less risky as retirement approaches.
There’s now evidence that target-date funds may be working. They’re giving investors solid returns, data from research firm Morningstar show. Just as importantly, they’re boosting those returns by protecting investors from their worst instincts.
A good thing, because the retirements of millions of Americans, and especially young people, now rely on target-date funds.
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This year, for the first time, more than half of all 401(k) contributions will go into target-date funds, research firm Cerulli Associates estimates. It projects the assets in target- date funds to hit $2 trillion by 2019, when 88 percent of all 401(k) contributions will go into the funds.
With 10 years of history, there’s now enough of a track record to judge just how well investors are doing in target-date funds. The average per-year return over the past decade was 5 percent, Morningstar estimates. That’s about what you would expect from funds that are a blend of stock and bond funds. Stock funds were up an annual 7.5 percent over the past decade, while bond funds were up an average 4.4 percent.
But target-date funds have one big advantage over other kinds of mutual funds, the data show. The average mutual fund has a flaw, which is that the average investor hardly ever does as well as his or her funds.