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If your 401(k) is invested in a target-date fund -- a fund with investments that adjust automatically to a more conservative position as you age -- take a look at yourself in the mirror and decide whether you're a good candidate for a fund like this.
J.P. Morgan Asset Management has studied target-date funds and their investors for nearly 10 years. The goal of the internal study is to help employers choose the right funds for their workers. The study finds that the assumptions used in the design of these funds don't match the behavior patterns of actual plan participants.
That's because many target-date funds assume that investors are going to be model savers, starting their retirement savings at a 6 percent rate when they are 25, and by age 35, saving 10 percent on an income that has risen steadily. The reality, the study concluded, is that most people start contributing at 5 percent and increase their savings levels slowly. They don't start stashing away 10 percent until they are age 59. Along the way, they are likely to take sizable account loans and preretirement hardship withdrawals.
The study also found that 83 percent of savers withdrew their entire account balance within three years of their retirement. J.P. Morgan concludes that because people take their money out so quickly, a target-date fund that has high allocations to equity in the later years of a saver's work life exposes investors to unnecessary risk.
If this pattern of saving sounds like you, and you are one of the many invested in a target-date fund, it would be smart to get expert advice. An adviser can take the time to look at your savings history and help you find a target-date fund that suits you and your retirement planning style -- or switch you to other sorts of investments.
