More investors are turning to diversified target-date strategies and related exchange traded funds for a simplified, all-in-one retirement savings plan.
Brooks Herman, head of research at BrightScope, said that assets in target-date funds have increased 24% to $624 billion in 2013, Reuters reports.
Target-date strategies take their namesake from the year when investors plan to retire or stop contributing to their savings. The fund allocates a diversified mix of stocks, bonds and cash equivalents that correspond to an investor’s retirement outlook. For instance, someone who plans on retiring near 2020 can consider a target-date 2020 fund.
“It really comes down to behavioral finance,” Herman said in the article. “The average American worker has this mentality of ‘set it and forget it.'”
The funds have adjusted holdings that depend on an investor’s time horizon and risk appetite. For instance, a later-dated target fund would heavily tilt toward riskier equities, with a smaller position in fixed-income and cash equivalents.
On the other hand, a near-term fund would include heavy positions in bonds and cash equivalents since someone who is about to retire would more focused on income generation and preserving wealth.