Target date funds have revolutionized retirement investing by offering a simple, hands-off approach to building wealth. These all-in-one funds automatically adjust your investment mix as you age, making them ideal for investors who want professional portfolio management without the complexity. This guide explains how they work and whether they are right for you.
What Is a Target Date Fund?
A target date fund is a mutual fund designed to be the only investment you need for retirement. You choose a fund with a target year close to when you plan to retire, and the fund automatically manages your asset allocation over time.
How Target Date Funds Work
- Choose your target year: Select a fund with a date near your expected retirement (e.g., 2050 Fund for someone retiring around 2050)
- Automatic diversification: The fund invests in a mix of stocks, bonds, and other assets
- Glide path: The fund gradually shifts from aggressive to conservative investments as the target date approaches
- Ongoing rebalancing: The fund automatically maintains the intended allocation
Example: A 2055 Target Date Fund today might be 90% stocks and 10% bonds. By 2055, it might be 50% stocks and 50% bonds. The shift happens gradually and automatically.
The Glide Path Explained
The glide path is the fund's plan for shifting from growth-oriented investments to income and preservation investments over time.
Typical Glide Path Example
- 30 years before retirement: 90% stocks, 10% bonds
- 20 years before retirement: 80% stocks, 20% bonds
- 10 years before retirement: 65% stocks, 35% bonds
- At retirement: 50% stocks, 50% bonds
- 10 years after retirement: 35% stocks, 65% bonds
To vs Through Funds
Target date funds fall into two categories based on how they handle the glide path after retirement:
"To" Retirement Funds
- Reach most conservative point at retirement
- Stop adjusting after target date
- More conservative approach
- Example: T. Rowe Price
"Through" Retirement Funds
- Continue adjusting after retirement
- Most conservative point 10-20 years after
- Slightly more aggressive
- Example: Vanguard, Fidelity
Advantages of Target Date Funds
Target date funds offer several benefits that make them attractive for retirement investors.
Simplicity
You only need to make one investment decision: choose the fund with a date close to when you plan to retire. The fund handles everything else.
Automatic Rebalancing
When markets move, your allocation can drift from your target. Target date funds automatically rebalance to maintain the intended mix.
Professional Management
Investment professionals design the glide path and select the underlying investments based on decades of research and market experience.
Behavioral Benefits
Because everything is automatic, you are less likely to make emotional decisions like panic selling during market downturns or chasing hot stocks.
Diversification
Target date funds typically invest in multiple asset classes including US stocks, international stocks, bonds, and sometimes real estate or commodities.
Disadvantages of Target Date Funds
Despite their benefits, target date funds have some drawbacks to consider.
One Size Fits All
Target date funds assume everyone retiring in the same year has the same risk tolerance and financial situation. That is rarely true.
Higher Fees
Target date funds charge fees on top of the fees charged by their underlying funds. This can add up, though low-cost providers have competitive options.
Limited Customization
You cannot adjust the allocation or choose the underlying investments. If you disagree with the fund's approach, your only option is to choose a different fund.
Potentially Too Conservative
Some target date funds become very conservative near retirement, which may not be appropriate if you have other income sources or a long retirement horizon.
Fee comparison: Vanguard Target Retirement Funds charge around 0.12% annually, while some provider funds charge 0.50% or more. Over 30 years, this difference can cost tens of thousands of dollars.
How to Choose a Target Date Fund
Not all target date funds are created equal. Here is what to consider when selecting one.
Consider the Expense Ratio
Look for funds with low expense ratios. Index-based target date funds from Vanguard, Fidelity, and Schwab typically have the lowest costs.
Understand the Glide Path
Review the fund's glide path to see how aggressive or conservative it will be over time. Make sure it aligns with your risk tolerance.
Check the Underlying Investments
Look at what funds are held within the target date fund. Index funds generally outperform actively managed funds over time.
Compare Providers
Different providers have different philosophies. Some are more aggressive, others more conservative. Review several options before deciding.
Target Date Funds in Your 401(k)
Target date funds are often the default investment option in 401(k) plans, and for good reason.
Why They Are Popular in 401(k)s
- Easy for employees to understand and use
- Meet Department of Labor qualified default investment alternative requirements
- Reduce the risk of poor investment decisions
- Provide appropriate diversification automatically
Should You Use Your 401(k)'s Target Date Fund?
It depends on your 401(k)'s options. If the target date fund has reasonable fees and a sensible glide path, it is often a good choice. If the fees are high, consider building your own portfolio from the plan's other options.
Alternatives to Target Date Funds
If target date funds do not fit your needs, consider these alternatives.
Three-Fund Portfolio
Build a simple portfolio with a US stock index fund, an international stock index fund, and a bond index fund. Adjust the mix based on your age and rebalance annually.
Target Risk Funds
Also called balanced funds, these maintain a fixed allocation (like 60% stocks, 40% bonds) regardless of your age. You adjust your holdings as you age.
Robo-Advisors
Automated investment services create and manage a customized portfolio based on your specific situation, often at low cost.
Common Target Date Fund Mistakes
Avoid these errors when using target date funds.
Choosing the Wrong Date
Do not automatically pick a fund matching your expected retirement year. If you have a high risk tolerance, choose a later date. If you are conservative, choose an earlier date.
Holding Multiple Target Date Funds
Holding funds with different target dates dilutes the intended allocation and defeats the purpose. Pick one fund.
Mixing with Other Investments
Target date funds are designed to be complete portfolios. Adding other investments changes your allocation in ways you might not intend.
Ignoring Fees
A 0.5% fee difference compounded over 30 years can cost you hundreds of thousands of dollars. Always compare expense ratios.
Track Your Retirement Progress
Pro Trader Dashboard helps you monitor your retirement investments and track your progress toward your financial goals.
Summary
Target date funds offer a simple, effective way to invest for retirement. They automatically manage your asset allocation, rebalance your portfolio, and adjust your risk over time. While they are not perfect for everyone, they are an excellent choice for investors who want professional management without the complexity. Choose a low-cost option, understand the glide path, and let compound growth do the rest.
Want to learn more about retirement allocation? Read our guide on retirement portfolio allocation by age or explore the 401(k) investing guide.