What Is a Target-Date Fund?

Is It a Good Idea for You?


Many businesses offer 401(k) plans to help their workers save for retirement. Employees receive a list of available investment options as part of the enrollment process. For many, this step of determining which investments to choose can be a daunting task. That's why a lot of companies—up to 87% according to one study1—use target-date funds as the default option.

But you don’t need a workplace retirement plan to invest in target-date funds. They can be useful in an individual retirement account (IRA) too. If you are thinking about investing in a target-date fund, here are some important things to keep in mind.

What Are Target-Date Funds?

Target-date funds are named for the main feature they offer investors: an investment mix that shifts over time based on a date you choose. The date refers to when you plan to start using your money, typically around the year you plan to retire.

Most target-date funds measure time in five-year increments. So if you plan to retire in 2031, you might choose a target-date 2030 fund.

Why Target-Date Funds Are Popular

What's made these types of investments so attractive for retirement savers? For 401(k) and IRA holders alike, target-date funds adjust over time. This simplicity appeals to many investors. They also address important investment concepts, such as diversification and an investor's time horizon.

In contrast, savers invested in only a money market account may find themselves lacking the growth potential from stock exposure needed to reach their retirement goals. Let’s explore how target-date funds tackle these challenges.

Broad Diversification

Target-date funds are generally broadly diversified, which means they include a variety of asset classes, including stock, bond and cash-equivalent investments. Having a mix of asset types is important because the funds often respond differently when markets change and may help offset each other—when one investment is in favor, another may be down.

You should note that diversification does not ensure a profit nor shield you from loss of principal. However, it may help you ride out market ups and downs. This can take some of the emotion out of investing so you’re not tempted to cash out prematurely. (Find out why cashing out can be costly.)

Time-Horizon Alignment

A target-date fund’s investment mix automatically changes over time. How this shift occurs is called the glide path. Portfolios with a far-term date usually start out with more stocks and are considered to be more aggressive. Investors with longer time horizons generally have a higher risk tolerance than those with shorter horizons because they have more time to recover from any market downturns.

As the target date approaches, portfolio managers dial down risk to be more conservative by reducing the exposure to stocks and increasing exposure to bond and cash-equivalent investments. For example, a target year of 2025 will generally have more bonds than a target year of 2045.

Professional Portfolio Management

When you choose a target-date portfolio, you're often choosing a fund-of-funds option, meaning the portfolio holds several underlying mutual funds. Experienced money managers handle the day-to-day work of adjusting allocations to the underlying mutual funds and determining the appropriate combination of asset classes. They also monitor and rebalance the portfolio to lower risk as the target date approaches.

Convenience in One Choice

You could choose your own selection of stock, bond or money market mutual funds. However, that may involve additional steps and resources. For example, if there are account minimums, you would need to have enough money to invest in each individual fund. You would also need to research each investment option to know how much of each to hold in your portfolio. Choosing a target-date fund gives you the convenience of a diversified portfolio in a single investment.


Consider a Target-Date Fund for Your IRA

The good news is that the benefits of target-date investments described here are available beyond workplace retirement plans. Explore our target-date fund options or call us at 888-345-2441 to discuss your options.


Consider a Target-Date Fund for Your IRA

1100 Must-Know Statistics About 401(k) Plans, September 2020, Morningstar, Inc.

A target date is the approximate year when investors plan to retire or start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date.

Each target-date portfolio seeks the highest total return according to a preset asset mix. Over time, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio's allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and cash equivalents.

Diversification does not assure a profit nor does it protect against loss of principal.

You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.