Target-date funds have been on a tear, and it doesn't look like they'll lose popularity anytime soon.
More than $1.1 trillion in assets is now invested in them, according to BrightScope, a researcher that ranks 401(k) plans. That's a 280 percent increase in five years, and BrightScope predicts that $2 trillion will be invested in such funds by 2020.
Target-date funds got a major boost in 2006 with the Pension Protection Act of 2006, which allowed employers to default employees into them if they didn't elect another investment option. Previously, those employees would have been directed toward money market or stable value funds, where those contributors had no chance of growth.
Eighty-eight percent of 401(k) plans now offer a target-date option among their investment choices, and 64 percent of participants had a position in them at the end of 2014, according to Vanguard Group, the largest provider of target-date funds.
The appeal to investors is obvious, said Brooks Herman, BrightScope's head of research. "By and large—while they're not a magic bullet—they do a good job of helping employees do the right thing," he said.
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Target-date funds take a lot of the guesswork out of investing for retirement. Just pick your retirement date and the fund does the rest. The offerings are more aggressive on equities when retirement is still a long way off, and they grow gradually more conservative along a glide path.
Some funds are managed only "to" retirement, and their asset allocations are the most conservative at their target date. Others are managed "through" retirement so that they continue to maintain an asset allocation of stocks and bonds even when investors are already retired.
Many financial experts believe that while target-date funds are an improvement from no-growth money market funds, where many retirement assets languished due to inaction, investors might be able to do better on their own. Here's a look at some pros and cons of target-date funds.
The bottom line? A target-date fund is a solid choice in many cases.
If you're not inclined to investigate all your investment options and come up with an optimal portfolio—and then monitor it on an ongoing basis—then a target-date fund is probably the way to go. What's more, a target-date fund may be the best choice available in your plan.
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But for investors willing to take a more active approach, a target-date fund may be too limiting. Decide your ideal asset allocation and then implement it with the fund choices in your plan or get a financial advisor to help you.
But keep in mind, then, that you'll need to do some of the heavy lifting of a target-date fund yourself. As you move closer to retirement, you'll need to revisit your asset allocation and make adjustments along your own glide path.
—By Ilana Polyak, special to CNBC.com