A couple of brokerages and fund companies are courting younger workers just getting their feet wet with outside-of-401(k) investing. They’re lowering the barriers to entry in the form of minimum fund investments.
* Charles Schwab lowered the minimum from $2,000 or $2,500 to $100.
* American Century Investments established new funds with $500 minimums for young investors.
* Fidelity created a five-question survey to assist in modeling a complete portfolio.
* Vanguard introduced target-date funds for people retiring in 2050 and beyond.
The best way for younger investors to get started, say advisers, is to contribute enough to their employer 401(k) plan to get the full company matching contribution, which represents a guaranteed return on your investment… The most important thing, though, is simply to start early. An investor who starts saving at age 32 and contributes $100 a month to a tax-deferred account will have about $195,000 at 65, assuming an 8% annual return, according to T. Rowe Price. But an investor who starts saving at 22 and contributes $100 a month for 10 years — and then stops saving — will have more than $255,000 by 65.
There are some drawbacks to all the efforts the companies are making in order to draw in younger clients. For example, for long term investing, the target date funds may be too conservative. It’s important to take a look at the mix of stocks and bonds as it can differ from one company to another, even for funds with the same target date.
While some funds have lower minimums, the companies may be charging a maintenance fee if the account’s balance is under a certain amount.
Some companies may attempt to lead investors towards load funds — funds with an up-front commission, beneficial to the broker. They are usually not as beneficial to the investor compared with no-load funds.
As I’ve mentioned in the past, target date funds are “funds of funds,” and in some cases, they charge a management fee on top of each of the underlying funds’ management fees. It’s more efficient to manage your own asset allocation, as you’ll get to keep more of your funds’ returns, but if you consider periodic (but rare) reallocations too much work, you may be willing to pay the extra management fee.
Anything to get younger people investing sooner is a good thing, but it’s also important that the newbies receive some education along the way. The beginning is the time when it’s the most important to make the right decisions. Compounding interest and returns magnify every choice made at the beginning. It’s also the time when it’s the most difficult to make the right decisions simply due to lack of experience.
Fund Firms Lower Bar For Younger Investors [Wall Street Journal]
Updated June 22, 2016 and originally published July 18, 2007.