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This week, Fidelity Investments released a study of 401(k)s based on accounts managed by the mutual fund giant. One interesting finding reported that Gen Y, the generation born between 1979 and 1991, really likes target-date retirement funds.
More than half, 51 percent, of 401(k) participants in that age group invest 100 percent of their retirement assets in a target-date fund. Only 30 percent of other age groups use the funds.
That may explain another finding in the study which showed that Gen Y is the most properly allocated age group with 67 percent of the cohort showing allocations that are within 10 percentage points of the Fidelity Freedom Fund, the yardstick the company uses to gauge such things.
Target-date funds are mutual funds made up of stocks, bonds and some other asset classes including commodities and real investment trusts, depending on the particular strategy of the fund.
According to Morningstar's fund screener, target-date funds aimed at retirement years between 2041 and 2045 have an average expense ratio of 0.50 percent and have returned 9.83 percent on average each year to date. The Standard and Poor's 500 index, by way of comparison, has returned 13.03 percent this year.
For some context on the expense ratios, the average expense ratio of institutional stock funds is 0.99 percent, while the average expense ratio of institutional bond funds is 0.64 percent, also from Morningstar and originally reported in a post on retirement plan fees.
Institutional shares are generally cheaper than those available to retail customers.
I wonder if Gen Y'ers are just not motivated to switch out of them rather than proactively seeking them out. Automatic enrollment and default investment choices capitalize on people's natural laziness or inertia.
Rather than requiring workers to opt in to retirement plans, employers that use automatic enrollment require opting out. Contributions flowing into the account need somewhere to go, and target-date funds are one of the few options plan sponsors can use, by law, as a default investment.
Do you like target-date funds? Why?
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Gen Y will find out the hard way that their target date funds are generally underperforming the stock market and other quality mutual funds. I believe it to be laziness.