| Many 401(k) investors don't use target-date funds the right way | | |  | WED, JUL 14, 2021 | | | | Target-date funds have become a popular investment option within 401(k) plans. In fact, assets in TDFs rose to an estimated $2.8 trillion last year vs. $2.3 trillion in 2019, according to a Morningstar report.
Target-date funds provide a simple way to save for retirement, and they offer exposure to a variety of markets, active and passive management, and a selection of asset allocation.
Also referred to as life-cycle funds or age-based funds, the concept is simple: Pick a fund, put as much as you can into the fund, then forget about it until you reach retirement age. That means TDFs were designed as one-stop shops for 401(k) investors that put retirement savings on autopilot. Investors are meant to park their nest egg in one fund, generally based on their retirement year, which automatically shifts from stocks to bonds over time.
However, as reported by CNBC's Greg Iacurci, many 401(k) plan investors are not using target-date funds the right way.
To that point, 33% of investors aren't limiting themselves to one target-date fund, according to 401(k) data from Vanguard. These investors are piling other type of funds (like mutual funds and index funds) on top. Using the funds this way may inadvertently add more investment risk, financial experts say.
It's therefore important TDF investors are aware of how other retirement investments could skew their asset allocation over time. Investors who don't rebalance could end up with more risk than they'd like.
CNBC's Iacurci spoke with several financial experts and details some interesting TDF investment strategies.
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