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Young workers in target-date funds hit hard by market drop

Young workers who have all their retirement funds tied up in long-range target-date funds may have been the hardest hit.

The average 25-year-old fully invested in a 2060 target-date fund series saw a 10 percent decline in account value from the market’s recent peak on July 17 through Monday’s close, according to Morningstar - close to the 10.96 percent decline of the S&P 500 over that period.

Meanwhile, the average 65-year-old set to retire this year and invested in a 2015 TDF series saw just a 5 percent decline.

Even if stocks continue to rebound in the days ahead, the experience of watching value shrink may be an eye-opener to new investors who might not have thought about their risk tolerance before.

Target-date funds are designed to adjust an investor's risk as retirement age approaches, through what is called a glide path. The farther out the fund's end date, the higher the stock allocation. Investors in 2060 funds have equity exposure ranging from 83 percent to 94 percent, says Janet Yang, director of multi-asset-class manager research at Morningstar. In the 2015 funds, aimed at workers who will be retiring very soon, average equity exposure is just 42 percent.

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