Target-Date Fund

Understanding The Account

Definition of The Term

Target-date funds (TDFs) are designed to simplify retirement investing by adjusting the asset mix over time to balance risk and return as the investor's chosen retirement date draws nearer. Initially, the fund will typically allocate more to growth-oriented investments like stocks, and gradually shift towards more conservative assets such as bonds and cash equivalents as the target date approaches. For 401(k) participants, TDFs may be the default investment option, providing a convenient, hands-off approach to retirement savings.

Key Points

Forgetting to Rollover your contributions leaves money on the table
Be sure you consider the pros and cons of different rollover options
Understand company stock might have different implications

Additional Resources + Information

Investment Strategy

TDFs are constructed with a glide path in mind, which refers to the fund's asset allocation strategy that becomes more conservative as the retirement date nears. This means a TDF with a date far in the future will hold a higher percentage of stocks to maximize growth, while one with a nearer date will hold more bonds to prioritize capital preservation.

How to Pick Target-Date Funds

An investor in their early twenties planning to retire around 65 would likely opt for a fund with a target date around the year 2065. This long-term horizon allows the fund to focus on growth in its early stages.

Portfolio Composition

The composition of a TDF can vary greatly among providers, even for funds with the same target date. Some may favor domestic equities, others international, and the quality of bonds can range from high-grade to high-yield, affecting the fund's risk profile.

Pros & Cons

Pros

Simplicity: TDFs offer a set-it-and-forget-it investment solution.
Comprehensive: They provide a mixed portfolio in a single investment.
Diversification: Investors benefit from a diversified asset allocation.

Cons

Cost: TDFs may carry higher fees compared to other index funds.
Non-Guaranteed Income: There is no promise of a certain income level.
Inflation Risk: Some TDFs may not offer adequate protection against inflation.
Inflexibility: They may not suit changes in an investor's financial goals or circumstances.