Attention, younger workers whose 401(k) savings are in target-date funds: Brace yourselves.
If you are decades away from retirement, your target-date fund is likely invested heavily in stocks. And with the stock market stumbling and tumbling over the last two trading days — and continued volatility expected — there's a good chance your account balance is in for a wild ride.
A target-date fund is a fund that seeks to grow assets over a specified period of time for a targeted goal. Target-date funds are usually named by the year in which the investor plans to begin utilizing the assets. The funds are structured to address a capital need at some date in the future, such as retirement.
Experts say this is when you take a deep breath and remember that ups and downs in the market are normal. If you're in for the long haul, remind yourself that corrections — no matter how severe — are always followed by upswings in the market.
"What happens in the market day to day, week to week, even month to month, does little to affect [young retirement savers'] ultimate outcome," said certified financial planner DeDe Jones, managing director at Innovative Financial in Lakewood, Colorado. "Ignore the financial porn and focus on your own goals."
The major stock indexes on Monday had their highest percentage-point drops since August 2011 and erased their 2018 gains. The index shed 4.1 percent to close at 2,648.94. The Dow Jones industrial average lost 4.6 percent to close at 24,354.75. This came on the heels of a 2.5 percent drop in the Dow on Friday.
About 48 percent of 401(k) participants held target-date funds at the end of 2014, according to the Employee Benefit Research Institute.
Average target-date returns last year
| Year | 2017 return |
|---|---|
| 11.29 percent | |
| 12.46 percent | |
| 14.67 percent | |
| 16.57 percent | |
| 18.43 percent | |
| 19.52 percent | |
| 20.51 percent | |
| 21.08 percent | |
| 20.67 percent | |
| US Fund Target-Date 2060+ | 21.27 percent |
Source: Source: Morningstar Direct
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."
