That’s why many plans offer target date funds (TDFs).
A popular choice for retirement savers, TDFs are designed to make it easier for participants to know what to select for their assets: a fund with the year closest to their retirement date in its name. For example, a TDF with 2055 in its name suggests that the fund is being managed for investors who plan to retire in or near 2055, their “target date.”
Some TDFs are set up to take the investor to retirement while others are managed to take you through it. “To” funds reach their most conservative when the target date occurs. Their asset allocations don’t generally change after the target date is reached. Allocations in “through” funds continue to change, and they reach their most conservative later in retirement.
Sometimes referred to as life cycle funds, TDFs are often mutual funds or collective investment trusts (CITs), meaning they pool together money from many investors who have similar objectives. Target date fund managers commonly invest in other mutual funds, which may include stocks (shares of companies), bonds (debts similar to IOUs) and other types of investments.
Regardless of what the fund manager invests in, the TDFs’ asset allocation — or the way the investments are divided among asset types — becomes more conservative as the target date nears. These funds often start out containing a higher percentage of stocks, which carry more risk but create growth. Then, they gradually shift to containing a higher percentage of bonds and other low-risk assets intended to preserve savings and create income.
How a TDF works
The gradual adjustment from stocks to bonds and other more conservative types of investments is what’s known as the fund’s “glide path.” Think of it like an airplane touching down on a runway: The closer the airplane (the fund) gets to the landing strip (your target retirement date), the more conservative your investment mix gets. It might look something like this:
Benefits of investing in a TDF
Selecting a target date fund may be easier than picking individual investments for your retirement portfolio because:
- You select one fund to get a diversified investment portfolio
- The target date is in the fund’s name
- Asset allocation is managed for you
- Portfolio rebalancing is managed for you
- The fund becomes more conservative as the target date approaches
Things to consider about TDFs
- Retirement assets held outside of the plan might affect your overall asset allocation and diversification, the risks you’ve assumed and fees you’re paying
- TDF glide paths can vary widely, even among those with the same target date
- Investing in a target date fund doesn’t safeguard against losses
- Investing in a target date fund doesn’t guarantee that you will have enough income for retirement
- The amount you contribute and how well a fund performs help determine what you have available at retirement
- The fund’s fees and expenses can impact its long-term investment returns