BOSTON — Assets in target date funds rose 24 percent to $624 billion in 2013, a new report found, reflecting a surging stock market and how investors have flocked to the simplified retirement savings vehicles — often as their default choice.
Target date funds take their name from the year in which an investor plans to retire or stops contributing to savings.
The asset increase boosted top sponsors Fidelity Investments, Vanguard Group and T. Rowe Price Group (TROW), said Brooks Herman, head of research at BrightScope, the San Diego firm that tracked the assets in a report due to be released Tuesday.
Vanguard, meanwhile, is closing the gap on No. 1 Fidelity as it gathered nearly five times as many assets in 2013, according to data from Lipper, a unit of Thomson Reuters (TRI).
The figures show how savers prefer to let others worry about investment details, Herman said in an interview Monday.
“It really comes down to behavioral finance. The average American worker has this mentality of ‘set it and forget it,'” he said.
Herman cautioned the market leaders could still face growing competition in a sector that could reach $2 trillion in total assets by 2020.
The competition is cutting fees and institutional share classes, typically the cheapest, averaged 0.67 percent of net assets in 2013, down from 0.70 percent in 2012 and 0.72 percent in 2011, BrightScope said.
Investors like that most of the target date funds adjust their holdings as they approach retirement while taking into account their appetite for risk.
For young workers, for instance, the funds will hold a larger share of assets in stock funds than bond funds.
Jerome Clark, portfolio manager for T. Rowe Price’s target date products, said companies regard the funds as a way to diversify workers’ investments. The funds, “recognize that individuals are at very different phases of their lives, and invests them accordingly,” he said.
Target date funds also got a boost from regulatory changes since 2006 that made it easier for employers to automatically enroll workers into 401(k) savings plans. A recent Vanguard report showed 98 percent of plans with auto enrollment send workers to a target date fund or similar account.
BrightScope’s Herman said total target date fund assets of $624 billion at the end of 2013 were up from $503 billion at the end of 2012 and $383 billion at the end of 2011. Separate figures from Lipper showed that Fidelity was the largest target date sponsor in December, managing $180 billion, followed by Vanguard with $154 billion and T. Rowe Price with $102 billion.
Vanguard, known for its low-cost index funds, gathered the most target date inflows last year, with $17.5 billion, compared with $3.7 billion for Fidelity and $7.8 billion for T. Rowe Price, according to Lipper. (The Lipper and BrightScope data didn’t include some target date assets such as those in trusts).
Cost of living — 114.1
State tax burden — 8.4 percent
Median house price — $377,625, per Zillow.com
Climate — 69/39 January, 105/75 July
Traffic congestion — Didn’t make the Forbes list
Scottsdale is a retirement mecca, with a reasonable cost of living, state and local taxes well below the national average, a great quality of life and plenty of amenities. But housing costs are nearly double the national average. Winters are warm, but summers are sizzling hot. Peak temperatures can reach close to 120 degrees — after all, it’s in the desert. The locals will dismiss it as "dry heat," but that kind of heat will still send your electric bill for air conditioning soaring, and can necessitate you buying new cars more frequently than you’d like.
10. Scottsdale, Arizona
Cost of living — 130.0
State tax burden — 9.3 percent
Median house price — $417,600, per Zillow.com
Climate — 74/64 January, 89/80 July
Traffic congestion — Didn’t make the Forbes list
Key West offers Caribbean weather in the U.S., an attribute that makes it a natural choice for retirees. And who could resist the Jimmy Buffett-Parrot Head thing, especially once you’re living a life of leisure?
You might be better off if you resist. The cost of living is 30 percent higher than the U.S. average, and housing costs at least twice as much. Travel is another issue. Key West is the most remote location in the continental U.S. The only road off the 6-square-mile island is the Overseas Highway, a 127.5-mile causeway that is largely one lane in each direction.
Hurricanes — all too common in Florida — are rare in Key West — though Wilma did hit it in 2005. But when they do impact the island, though, it’s worth noting that the city has the Atlantic Ocean on one side and the Gulf of Mexico on the other, and there’s no part of it that’s more than 18 feet above sea level. So homeowners must pay several thousand dollars a year for hurricane insurance.
9. Key West, Florida
Cost of living — 132.3
State tax burden — 11.2 percent
Median house price — $482,000
Climate — 66/50 January, 77/67 August
Traffic congestion — Didn’t make the Forbes list
As big California cities go, San Diego is a bargain. But compared to the rest of the country, San Diego is certified high-cost. Yes, the weather is near perfect year-round. But the cost of living is one-third higher than the rest of the country, and house prices are nearly 2½ times the national average. Add in California’s high state and local tax rates and the earthquake issue, and San Diego should be crossed off your list of potential retirement cities.
8. San Diego
Cost of living — 165.7
State tax burden — 10.2 percent
Median house price — $680,000
Climate — 80/66 January, 88/75 July
Traffic congestion — Second worst gridlock in U.S.
Can you imagine a more idyllic place to retire than Honolulu? Probably not. But as beautiful as it is, it shares many of the financial strains common to other cities on this list, plus a few more.
The overall cost of living is second only to New York City. After all, most of the goods people need have to be shipped across thousands of miles of ocean. The state tax burden is only slightly higher than the national average, but the median house price is triple the national average.
Finally, as far as cost of living is concerned, Honolulu has an unusual financial issue: travel expenses. Sooner or later, you’ll want to get away from Hawaii. And there’s no cheap way to escape from this paradise.
7. Honolulu
Cost of living — 164.0
State tax burden — 11.2 percent
Median house price — $860,000
Climate — 57/46 January, 70/55 September
Traffic congestion — Third worst gridlock in U.S.
San Francisco frequently makes those "favorite cities in America" lists and for good reason. Situated on a peninsula between the Pacific Ocean and the San Francisco Bay, it is one of the most scenic cities in the world. Mild weather year-round, world class cuisine, charming neighborhoods and an eclectic population make it one of the most desirable places to live anywhere in the world.
But it has the highest median house prices in the country, which should scare off retirees. Its cost of living trails only New York City and Honolulu. And like the rest of California, its state and local tax burden is second only to New York.
One other reason people might avoid living in San Francisco is that it’s prone to earthquakes. While that’s certainly a concern for personal safety, few people from non-earthquake prone areas realize how it increases your cost of living. Homeowners need to pay several thousand dollars per year for earthquake insurance.
6. San Francisco
Cost of living — 140.1
State/district tax burden — 4.0 percent on first $10,000 and up to 8.95 percent on income greater than $350,000 in D.C., 10.2 percent in Maryland, 9.3 percent in Virginia
Median house price — $395,000
Climate — 43/29 January, 88/71 July
Traffic congestion — 10th worst gridlock in U.S.
Washington is centrally located, is filled with historic attractions and has some of the most beautiful neighborhoods in the country. It also has one of the highest effective local income tax rates in the country. The district taxes the first $10,000 of income at 4 percent, then 6 percent to $40,000, then 8.5 percent on all income over $40,000 (you can exempt up to $3,000 in retirement income).
Like other cities on this list, Washington sports a high cost of living and some of the highest housing prices in the country. The area also has its share of toll roads, and traffic is a recurring problem. This is especially troublesome during the holidays and summer months. Interstate 95 — which bisects the metro area — is the principal travel corridor between the Northeast and Florida. Making traffic matters worse: the near-permanent road construction projects.
5. Washington, D.C.
Cost of living — 136.4
State tax burden — 11.2 percent
Median house price — $456,000
Climate — 68/48 January, 83/64 July
Traffic congestion — Worst gridlock in U.S.
As recently as the 1970s, Los Angeles was widely viewed as the city that all America was looking to move to — or at least to imitate. Perfect weather, endless beaches, palm tree-lined streets, plentiful housing, a powerhouse economy and the lure of rubbing elbows with a celebrity or two. Today, about the only things L.A. has going for it are near-perfect weather and In-N-Out Burger. The rest is mostly a faded memory. The city’s success was, in fact, a key contributor to its decline: The near-doubling of the metro population since the 1970s has created East Coast levels of human congestion.
Property values are higher than New York’s and nearly twice those of Chicago. The state and local tax burden in California is second only to New York, and the overall cost of living in L.A. is more than one-third higher than the national average. California’s unfunded pension liabilities are nearly as high as those in Illinois, threatening serious tax increases that could squeeze retirees. Nagging quality of life issues include the worst traffic congestion in the nation and smog that could lead to higher medical costs.
4. Los Angeles
Cost of living — 132.5
State tax burden — 10.4 percent
Median house price — $370,000
Climate — 36/22 January, 81/65 July
Traffic congestion — Ninth worst gridlock in U.S.
Boston is the quaintest large city in America, sporting centuries-old but impeccably maintained architecture, neighborhoods and surrounding communities that just ooze with charm and close access to the beaches of Cape Cod and the mountains of Vermont and New Hampshire. If Boston were a less expensive place to live, it could well be an popular and smart retirement destination.
But it isn’t. The high cost of living and high housing prices are the main reasons cited by former residents for leaving the state. The state tax burden is higher than the national average; the cost of living is about one-third higher than the national average; and house prices are nearly double the U.S. median. Translation: a large chunk of your retirement income would be spent just covering basic living expenses.
3. Boston
Cost of living — 116.9
State tax burden – 10.2 percent
Median house price — $247,000
Climate — 32/18 January, 84/68 July
Traffic congestion — Didn’t make the Forbes list
Based on the numbers, Chicago wouldn’t seem to be the retirement financial disaster that other cities on this list are. The state tax burden is only slightly higher than the national average; the cost of living is tolerably higher than the U.S. average; and house prices — while higher than the nation in general — are downright affordable compared to the coastal cities.
However, in addition to being a generally more expensive place to live than the nation at large, the area faces burgeoning problems just over the horizon. Illinois faces the highest unfunded pension obligations of any other state in the country, at around $100 billion. Chicago faces a nation-leading $20 billion unfunded pension liability. Such deficits scream out for higher taxes across the board. We can only speculate as to which taxes will be raised (or created).
2. Chicago
Cost of living — 216.7 Manhattan, 145.7 Nassau County
State tax burden — 12.8 percent
Median house price — $972,000 Manhattan, $440,000 Nassau County
Climate — 38/27 January, 84/69 July
Traffic congestion — Fifth worst gridlock in U.S.
The area has fantastic amenities -– theater, music, concerts, festivals, ethnic foods, diverse and quaint neighborhoods and close access to beaches and mountains. It also has probably the most comprehensive public transportation system in the U.S. But it breaks down spectacularly when it comes to the costs. The area has close to the highest cost of living in the country, which gets markedly worse the closer you are to Manhattan. House prices are out of sight, particularly in the more desirable communities and neighborhoods. New York State has the highest state and local tax burden in the country. New Jersey has the highest real estate tax burden in the country. And nearby Connecticut isn’t much better.
Weather runs from winter-time deep freezes to protracted summer heat waves. The preponderance of bridges, tunnels and their tolls — as well as antiquated roads running through quaint town centers — makes congestion a constant problem, even on the weekends.
1. New York City
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