Target-Date Funds Riskier Than You Think

With stocks dropping, plenty of participants in 401(k) and other retirement plans face steep losses. But the greatest threat to future retirement security may be the behavior of account holders themselves.

Too many participants are saving little or nothing. Of those who do save, millions fail to diversify their assets properly.

A recent study by the Government Accountability Office found that the median retirement account balance for employees aged 55 to 64 was only $50,000, and 37% of employees had no money saved in the plans at all.

To increase retirement accounts, employers are trying target-date funds and other techniques that put savings on autopilot. The idea is to steer employees into saving enough and diversifying their investments. Through trial and error, employers are struggling to implement the new automatic approaches. While there are some signs of improvements, it is too early to know whether the latest generation of retirement plans will present a solution to the massive problems.

The current difficulties began to emerge shortly after 401(k)s were introduced in the 1980s. At the time, some analysts hailed the new accounts as a major step in the evolution of capitalism, encouraging companies to replace expensive pension plans with flexible 401(k)s.

Under the old-style system -- known as defined-benefit pensions because they pay fixed amounts -- corporations set aside money for everyone in the plan. In contrast, 401(k)s rely on voluntary enrollment. To participate, an employee must typically fill out paperwork and elect to have money withheld from paychecks. From the beginning, a large percentage of potential participants decided not to enroll.

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