A new report from the Investment Company Institute (ICI) highlights some recent trends in Americans’ retirement wealth. Specifically, $24.5 trillion were held in IRAs, defined contribution (DC) plans, annuity reserves, and public- and private-sector defined benefit (DB) plans at the end of the second quarter of 2016. That is an increase of $323 billion (1.34 percent) from Q1, and $116 billion (0.48) higher compared to this same period last year. Moreover, total retirement wealth ended last quarter at a new all-time high and accounted for roughly a third (34 percent) of all household financial assets in the United States. Much of the gain in Q2 was due to defined contribution (DC) plan assets, which totaled $7.0 trillion at the end of June, an increase of $143 billion (2.09 percent) from Q1 and another new record. 401(k)s accounted for $4.9 trillion (69.52 percent) of total DC assets last quarter, of which the majority was invested in mutual funds. Most of these assets were kept in equity funds but hybrid funds, which include target-date funds (TDFs), have been quickly gaining ground.
That is not too surprising given that a TDF simplifies the investment process for plan participants by routinely adjusting the asset mix of stocks, bonds and cash equivalents in its portfolio so that the holdings are kept appropriate for the target investor’s changing nearness to retirement. This automatic rebalancing feature is one of the main reasons why TDFs have become quite popular over the past few years. Just look at the recent study from Vanguard which found that nine in 10 plan sponsors in America offered target-date funds at the end of last year, up 14 percent from 2010. Sixty-nine percent of participants in those plans made use of TDFs, with half of single target-date investors choosing the funds on their own instead of being defaulted in. TDFs, though, are far from perfect because they do not take into account an individual’s risk tolerance, net worth, tax situation, and other potentially critical variables. Alternatives such as target-risk funds are available but most retirement investors should consult with a professional financial advisor for help in determining exactly which strategy is the most appropriate for their unique situation.
Sources: Investment Company Institute (ICI), Pensions & Investments, VanguardPost author: Charles Couch