Flying Autopilot with Target-Date Funds: Points to Consider

What's in your 401(k)? For more of us, the answer is just a single fund.

Target-date retirement funds aim to make investing simple, and that's why their popularity is exploding. Just pick one pegged to the year you plan to retire, put money in steadily, and it will take care of loading up on high-growth, riskier stocks when you're young and moving into more conservative investments as you age.

That ability to put investing on autopilot is appealing to many workers, particularly younger ones opening an IRA for the first time who don't feel comfortable making investment decisions. A record $69 billion flowed into target-date funds last year, giving them $763 billion in total assets, according to Morningstar.

They're so popular that after Vanguard looked at nearly 4 million participants in 401(k) and similar plans that it keeps records for, it found roughly four in 10 had their entire account in just one target-date fund. Vanguard expects that to rise to six in 10 by 2020.

Some workers may not even realize they own a target-date fund. When employers automatically enroll their workers in a 401(k) plan, many use a target-date fund as the default investment because they prevent investors from having extreme portfolios, with either too much or too little stock.

Even though they're simple to use, it's important to remember that there's variety among target-date funds, and two can be starkly different even if they're aimed at the same year of retirement. The same target-date fund may also tweak its strategy from year to year. So it pays to check in on the autopilot from time to time to make sure it's still steered in the direction you want to go. Here are some questions to consider, whether you're already in a target-date fund or are considering entering one:

- How much of my target-date fund do I want in stocks now?

Some target-date funds are more aggressive, with more of their portfolios invested in stocks than others.

Stocks have historically had the best returns over the long term, but they can crash in a flash. Young workers have the luxury of time, so they can hold on in anticipation of better returns. Workers approaching retirement, though, can't afford to wait the years it can take for stocks to recoup their losses. So they lean more on bonds, which offer lower but steadier returns.

All target-date funds start off with nearly all their portfolios invested in stocks and gradually become more conservative. But each does so at its own pace, which the industry calls its "glide path."

The two biggest target-date providers, Vanguard and Fidelity, both start their glide paths at 90 percent stocks. But when retirement is 20 years away, Fidelity's fund still aims to have 90 percent in stocks, while Vanguard's plans for 82 percent, according to Morningstar.

- How much stock will I want 10, 20, 30 years from now?

Even if you're decades away from retirement, check how much stock your target-date fund provider has in its option for people already there. Would you be comfortable with that when you're retired?

You'll still need a good chunk of stocks, because retirement will hopefully last decades. Many target-date funds built for people retiring now have 40 percent to 50 percent in stocks, but many outliers exist on both ends. Morningstar found ones with as little as 8 percent and as much as 64 percent.

- How much are the fees?

The good news is that expenses are generally falling for target-date funds. Keeping costs low is one of the easiest ways to improve your returns.

Funds disclose their fees as something called the expense ratio, which shows what percentage of assets goes to cover expenses each year. Target-date options that use index funds will often have lower expense ratios than those that use actively managed funds. But that's not always the case. Make sure to check.

- Do I need to invest in anything else?

Don't worry about being not being "diversified" if your nest egg has just one target-date fund. It has investments spread across thousands of stocks and bonds around the world, and it's designed to be the only fund in your retirement account.

But you don't have to stay beholden to it. Some investors own other funds alongside a target-date option. Say you generally like your target-date fund, but you'd like it more if it had more foreign stocks. You could tack a small investment in a foreign-stock fund alongside it.

- Does my target-date fund have to be set for the year I want to retire?

No. If you're hoping to retire in 2045, but the target-date options available to you pegged to that year look too aggressive, take a look at the 2035 or even 2025 options.