Target date funds (TDFs) are typically mutual funds (sometimes exchange traded funds, or ETFs) reallocated over time to achieve age-based growth and security for your assets. The goal is to create a retirement fund that systematically takes appropriate risks throughout your lifetime.

Target date funds are often an investment option in 401(k) plans. They are also available as stand-alone funds. Instead of you or your adviser deciding how to allocate stocks, bonds and TIPS in your portfolio, the target date fund does it for you.

How TDFs Work

TDFs have a feature called a “glide path.” A glide path is simply an age-based trajectory in which allocations within your portfolio change as you get older. In effect, the percentage of stocks decreases and the percentage of bonds and TIPS increases. At some point everything levels off and stays that way for the rest of your life. Most TDFs follow a “through” glide path in which allocations change even in retirement. Some follow a “to” glide path that levels off at your chosen target retirement age.

The Pros
  • TDFs offer an easy auto-enrollment 401(k) option for novice investors.
  • Automatic rebalancing and reallocation makes managing your TDF worry free.
  • Your portfolio will always contain a diverse mix of assets.
  • TDF funds are readily available in most 401(k) plans or as standalone offerings.
The Cons
  • Investments outside a TDF could create portfolio imbalance.
  • By mostly featuring funds from only one company, TDFs don’t always have the best managers.
  • In a TDF you lose the ability to change the weight of your investments; for example, you can’t reduce the percentage of stocks in a down market.
  • Since most TDFs are funds of funds, fees can be high due to “layering.”
  • Large portfolios ($250K or more) may be less expensive in a custom allocation than in a TDF.

Points to Consider

Before deciding on a specific TDF, think about the following:

Philosophy

Do you prefer an actively managed (more expensive) or passively managed (less expensive) TDF?

Target Date

Your actual expected retirement date may not be the best target date for you. If you want to be more aggressive, choose a later-dated fund. If you favor a more conservative approach, shorten your timeline.

Glide Path

Think about “to” versus “through” (again, most TDFs are “through”). Beyond that, the details of the glide path and investment strategy should match your philosophy.

Risk

The fund you choose will likely be your retirement savings plan for years to come. Make sure the level of risk, via investments and glide path, is appropriate for you.

Fit

Check out fees, ease of getting information and responsiveness of customer service for any fund company you consider.

Other Investments

Over time your spouse’s 401(k), inherited IRAs and other investments may come into play. Consider everything as part of your portfolio.

Company Choice

The top four companies dealing in TDFs are T. Rowe Price, Vanguard, Fidelity Freedom and Schwab.

In Retirement

Once you reach retirement age—depending on whether the glide path of the TDF is “to” or “through”—you may need to consider other options for your investments. Many retirees with TDFs find it best to move their investments to an individual retirement account (IRA) where they have more investment options and more control. While a “through” glide path is designed to follow you into retirement, it may not fit your investment philosophy once you get there. After all, people do change.