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How to choose a mutual fund

What are the factors you should consider?

It may seem primitive to some, but not so long ago most investors figured out for themselves how much of their 401(k) retirement plan to put into stocks or bonds. Now, more are letting a target-date mutual fund take care of that, particularly younger workers.

One of every three savers with a 401(k) plan administered by Fidelity Investments has their entire account invested in just one target-date mutual fund, according to survey results released Thursday.

The reliance on target-date funds is even more pronounced among the youngest workers. Some 72 percent of those aged 20 to 24 have their complete 401(k) account balance invested in a single target-date fund. For workers aged 30 to 34, it’s nearly half: 45 percent.

“For young people, many haven’t really invested in the stock market before, and it’s a great solution for them to dip their toe in,” says Jeanne Thompson, vice president of thought leadership at Fidelity Investments.

Target-date funds are intended to be all that a saver will need for their nest egg through retirement, by taking care of the strategic investment decisions. Investors pick a fund set for the year that they hope to retire. When that date is far off, the fund own mostly stocks, hoping to reap the strong long-term returns that stocks can provide. As the hoped-for retirement year gets closer, target-date funds rely more on bonds, which carry less risk of a sharp drop in price.

Fidelity is the nation’s largest 401(k) administrator with 12.6 million accounts, and its survey results include data through Sept. 30. Others have seen similar trends. Vanguard found that 31 percent of all contributions made to the 401(k) and other defined-contribution plans that it administers went to target-date funds in 2012, up from 8 percent five years earlier. It also saw younger workers more reliant on target-date funds than older ones.

The sharp disparity may not be the result of a conscious choice. Nearly one of every four 401(k) plans that Fidelity administers enrolls workers automatically, up from one in eight five years ago. When that happens, the default investment choice for contributions is usually a target-date fund.

Although they don’t rely as heavily on target-date funds as their younger peers, the number of older workers relying on them is growing. Twenty seven percent of all Fidelity 401(k) participants aged 45 to 49 have their entire balance in a target-date fund. That’s up from 24 percent a year ago and from just 2 percent a decade ago.

Some 401(k) plan administrators are pushing employers to get more of their workers who are closer to retirement into target-date funds. Such funds let workers focus on what they can control – how much to save and when – and hand over the responsibilities of managing those investments, says Chip Castille. He is head of BlackRock’s defined-contribution group for the U.S. and Canada, and he helped develop the first target-date fund 20 years ago.

Some employers have essentially re-enrolled all the participants in their plan, putting savers – young and old – into target-date funds by default. But that has usually happened only around a corporate merger, acquisition or some other type of big event, Castille says.

Other highlights from Fidelity’s survey of 401(k) plan participants include:

401(k) accounts have never been bigger

Participant had an average balance of $84,300 at the end of September, a record high. That’s up 11 percent from $75,900 a year earlier. Nearly three quarters of that growth came from surging prices for stock mutual funds: The Standard & Poor’s 500 index returned 19 percent in the 12 months through Sept. 30, including dividends. The rest came from the contributions that workers and their employers made.

Over the last 10 years, contributions and market gains have played roughly equal roles in boosting 401(k) balances.

Workers are saving more

Fidelity says 401(k) participants are putting away an average $6,000 annually. Contributions have never been that high. Employer contributions are adding an average $3,240 annually.

Total 401(k) contributions have risen 1.9 percent from a year earlier, slightly better than the rate of inflation. The Consumer Price Index rose 1.2 percent in September from a year earlier.

Workers should be saving 10 percent to 15 percent of their annual income, including their employers’ contributions, Fidelity suggests.

Compare your account balance based on age

Younger workers just starting out don’t have anywhere close to the national average of $84,300. Those from 25 to 29 have an average of $12,200. Workers in their later 30s have an average $48,900 in their 401(k) accounts, and people between 45 and 49 have an average of $94,900. Late 50-somethings, who have had decades to build their accounts, have an average of $147,900.

That said, Fidelity suggests that your nest egg be at least eight times your annual income to comfortably retire.

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