Why Your 401(k) May Be Riskier Than You Realize
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Here's your money briefing for Wednesday, May 25th. I'm J.R. Whelan for The Wall Street Journal. Given all the volatility on Wall Street this year, you might not be surprised to see the value of your 401k decline. But what may surprise you is that it could be because your retirement funds are more heavily invested in stocks as opposed to bonds than you think. Many of the target date funds that 401k accounts invest in have been taking on greater risk.
So, for example, for the youngest workers, on average, target date funds now invest about 92 percent of their contributions in stocks. And that's up from 85 percent a decade ago.
So why have target date funds made this shift? And are they a safe bet in a roller coaster stock market? We'll check in with our retirement reporter, Ann Tergesen, after the break.
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Target date funds are a popular retirement savings tool. They're often found within 401k accounts, but they may be exposing investors' money to stocks more than they'd expect. So in a volatile environment for the stock market, what should you know about target date funds?
What warning introduces this episode about 401(k) risk?
WSJ retirement reporter Anne Tergesen joins us to discuss. Hey, Anne, thanks so much for being here.
Thanks for having me.
So Anne, catch us up here for a moment. What is a target date fund and how is it different from a traditional 401k?
A target date fund is a fund, usually a mutual fund, that contains stocks and bonds. And it shifts from sort of an aggressive allocation, which may be as much as 90% in stocks for young investors, people who are just starting out their working careers. And then it shifts over time to be composed of a greater proportion of bonds as people age. So the idea is that you get an all-in-one fund with both stocks and bonds and that it shifts the allocation between stocks and bonds to become more conservative over time as people approach retirement age. Target date funds are the most popular type of investment within 401 plans. And target date funds these days attract about 60% of the contributions to 401 accounts.
So essentially with a target date fund, what you're doing is you're outsourcing the management of your 401 to the experts who run these funds, who give thought to what the asset allocation should be for people your age. That doesn't mean you have to accept it. If you look at it and you say, you know, this doesn't really suit me, then, you know, by all means, you can make the change. But you just have to think through whether you have the interest and the expertise to take that on yourself and the desire to take it on yourself. And, you know, some people do and some people don't.
But now you report that the mix of stocks and bonds and target date funds has changed quite a bit in recent years. What's going on there?
My article looked at research from Morningstar that indicates that over the past decade or so, on average, target date funds have been embracing stocks to a greater extent than they used to.
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