The problem with retirement investing
Don't knock the 401k yet. The real culprit might be our issues with saving and investing.
The savings rate is higher this year than in the recent past, but it's still only 3.6% for the first three quarters of 2009, writes Kwak (who runs The Baseline Scenario blog).
Add to that the fact that people are not smart about investing. For example, he writes, most people invest in stock mutual funds, which do worse than the overall market.
On top of that, the average mutual fund investor doesn't do as well as the average mutual fund. That's because people chase returns, he writes. They take money out of underperforming funds and put it in funds that are doing well.
That often means, however, that they're taking money out just as a fund is headed up, he writes. And they funds they move the money to are likely to go down (not in every case, of course, but in many).
One could argue that these are a matter of choice. People could save more, and they could make smarter investing decisions. But given that they don't, we could very well see tens of millions of seniors without enough money to live decently in retirement. Given that prospect, perhaps we should question leaving retirement security to individual choices and free markets.
Morningstar vice president John Rekenthaler reads all this and says he's grateful for target-date funds. "They do an excellent job of avoiding avoidable mistakes," he writes on his blog.
Target-date funds have an average annual expense ratio of 0.69%, which is below the industry average, he writes. They also have good active management.
Finally, Rekenthaler writes, "target-date investors are the stablest investors in existence. They hardly ever make trades."
For an opposing opinion, check out what Tim Middleton of MSN Money has to say about target-date funds.
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