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Over half of 401(k) savers invest in one kind of fund

401(k)s and new jobs

When it comes to where retirement savers are putting their money, one type of fund has taken the lead. The percentage of participants relying on a single "target-date fund" for all their retirement savings is at an all-time high of 51 percent, according to Vanguard's annual benchmarking report, How America Saves 2018. This is a generally good thing because these funds provide professional investment management and asset allocation, especially for those just starting to save for retirement.

Target-date retirement funds aim to match an investor's asset allocation with his or her age. They automatically rebalance the allocation by gradually reducing the portion in stocks and increasing the portion in cash and bonds as the fund's target maturity date approaches -- typically the year the investor plans to retire. These funds provide professional investment management and asset allocation. 

Fueling the popularity in target-date funds to their current high is that many plans make these funds the default option when newly eligible participants are automatically enrolled in a company's retirement plan.

But target-date funds aren't without downsides. Anyone who's automatically enrolled into one needs to know they aren't personalized for any particular worker's specific situation or investment objectives. For example, if you want to increase your allocation to stock funds and decrease it to bond funds, target-date funds don't allow you to make this personalized adjustment. And if you want to maintain a higher allocation in stocks even as you near retirement age, that's also not doable.

Keeping retirement savings on track

You might have good reasons to want to personalize your 401(k) allocations. Your other retirement savings outside the 401(k) plan may be invested more conservatively. Your employer's plan may offer a lineup of very well managed funds, which when used together in a personalized allocation could outperform the target-date fund. Also, you may want to reduce your allocation to bonds and use a "stable value fund" because as interest rates rise, bond prices fall -- and many bond funds will underperform stable value funds.

Vanguard's report also points out that the growing reliance on target-date funds and professional account management has coincided with a reduction in extreme allocations in retirement accounts, which is another good thing. For example, it found that the percentage of participants holding 61 percent or more in company stock declined from 12 percent in 2008 to just 4 percent last year. The percentage of participants holding no stock funds declined from 11 percent to just 3 percent. And participants holding 90 percent or more in stocks declined from 17 percent to 11 percent over the same period.

On the negative side, the report also found that the most important behavior in determining how much participants will have saved by retirement -- the amount the employee contributes -- hasn't improved. It has remained stagnant between 6.8 percent to 7 percent of pay since 2008. But even saving 7 percent in your 401(k) account isn't sufficient to build adequate retirement savings for most workers. This is particularly true for those who are covered solely by a 401(k) plan. 

Most workers in this situation today need to save and contribute at least 10 percent of their gross income into their 401(k), according to several studies on savings and retirement preparedness.

Vanguard's report looked at 1,900 retirement plans for which it provides client recordkeeping and administration services. These plans cover 4.6 million participants.