These funds — whose assets start out in riskier assets like stocks and automatically shift into more conservative investments as you approach retirement — also are often the default option when an employee does not specify investment choices in their 401(k) plan.
More than $1 trillion is parked in target-date funds, according to research firm Morningstar. That’s up from $706 billion at the end of 2014.
For young retirement savers, this could be the first time they are facing a market meltdown.
For more than 8½ years, the stock market roared ahead. Every setback has been followed by a new high. And for young workers holding stock-laden target-date funds, those gains have been reflected in balances that have seemed to go in one direction: up.
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“This is going to be hard for young professionals who have watched the stock market pretty calmly marching upward,” said Kathryn Hauer, a CFP with Wilson David Investment Advisors in Aiken, South Carolina. “For the most part, they’ve just seen their 401(k) balance go up, up, up.
“For someone who hasn’t seen this kind of drop, it’s going to be upsetting.”
Whether the current moves in the stock market will mark a major correction with sustained lower values or just a brief dip is uncertain at this point.
The important thing is to continue contributing to your 401(k) on a regular basis. If you get spooked and move your money out of stocks after a big drop, not only are you selling stocks at a low price, you’re also going to miss out on the eventual upward climb.
“Young workers will be saving for another 30 or 40 years,” Hauer said. “And in that time, there will be up years, down years, bull markets and bear markets.
“This is a normal part of the stock market.”
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