Why You Might Want to Think Twice About Your 401 (k) Plan | Smart Change: Personal Finance

The emergence of target date funds

With most 401 (k) plans, employees are automatically enrolled unless they choose otherwise. Along with automatic enrollment into the company’s specific 401 (k) plan, generally a set percentage of an employee’s salary is deducted and contributed to the plan. As of 2020, 69% of people were in plans with automatic enrollment, and of that 69%, 98% of plans chose target date funds as the default investment option.

In 2011, 83% of 401 (k) plans offered target date funds. Fast-forward to 2020, and 95% of 401 (k) plans were offering target date funds, with 80% of all participants utilizing them. In fact, 67% of 401 (k) plan participants who used target date funds were invested in only a single fund. While most people investing in target date funds are doing so thanks to automatic enrollment, it’s worth noting that four in 10 investors chose the funds on their own.

Fees matter

While the increase in people utilizing target date funds is encouraging because it generally means more people are getting access to and utilizing 401 (k) plans, target date funds may not be for everyone – mainly because of the fees they come with. At the end of 2020, the average expense ratio for target date funds was 0.52%. This means that you’ll be charged $ 52 annually for every $ 10,000 invested into the fund.

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