Understanding Target Date Funds: From a Financial Advisor

Target Date Funds (TDFs) are designed to simplify investing by providing a professionally managed, diversified portfolio that adjusts over time. These funds are designed for specific financial goals, like retirement or paying for a child's education. They gradually change from a growth-focused strategy to a more conservative approach as the target date gets closer.

Let’s break down how Target Date Funds work and what to consider before investing.

How Do Target Date Funds Work?

Target Date Funds invest in a mix of assets like stocks, bonds, and cash. They change the balance as the investor gets closer to their goal. A younger investor, who has many years until retirement, might pick a fund with a target date far ahead. For example, they might choose a 2065 fund if they plan to retire around that year.

If you have a 401(k), you may already be in a Target Date Fund. Many workplace retirement plans use these funds as a default option. These funds are often found in 529 college savings plans as well. The target date matches when a child is expected to start college.

The key feature of a Target Date Fund is its glide path, which dictates how the asset mix changes over time. In the early years, the fund is more heavily invested in stocks to maximize growth potential. As the target date nears, the fund gradually shifts toward bonds and cash to reduce risk and provide greater stability.

Different Types of Target Date Funds

Although all Target Date Funds follow a glide path, they can differ in investment strategy and management style.

Three Main Investment Approaches

1.     Active Management – A team of professionals actively selects investments with the goal of outperforming the broader market.

2.     Passive Management – The fund tracks a benchmark index, such as the S&P 500®, aiming to match its performance rather than beat it.

3.     Hybrid Approach – This combines active and passive strategies. It allows for active management when it adds value. At the same time, it keeps costs lower in areas where indexing works well.

Another key distinction is whether the fund follows a “to” or “through” retirement strategy:

●      “To” retirement funds reach their most conservative allocation at the target date and maintain that balance throughout retirement.

●      “Through” retirement funds continue adjusting beyond the target date, gradually becoming even more conservative over time.

Investors should also check whether their chosen TDF merges into another fund upon reaching the target date. If so, reviewing the prospectus of the successor fund is essential to ensure alignment with long-term goals.

Why Consider a Target Date Fund?

TDFs offer several advantages, making them a popular choice for long-term investors:

●      Diversification – These funds hold a mix of assets, helping manage risks associated with market fluctuations.

●      Automatic Adjustments – The portfolio gradually shifts from aggressive growth to conservative stability, reducing the need for hands-on management.

●      Risk Management – By balancing exposure to stocks, bonds, and other assets, TDFs aim to manage various investment risks.

-Longevity risk – The danger of outliving your savings. A TDF’s exposure to stocks helps support long-term growth.

-Market risk – The potential for investment losses. Diversification across multiple asset classes can help manage volatility.

-Inflation risk – The threat of rising prices eroding purchasing power. Stocks and inflation-protected securities within TDFs can help towards counteracting inflation.

-Deflation risk – The risk of declining prices and economic slowdown, which is mitigated through a balanced asset allocation.

When Might a Target Date Fund Not Be Ideal?

While TDFs work well for many investors, some situations call for a more customized approach:

●      Early or Late Retirement Plans – If you plan to retire significantly earlier or later than the fund’s target date, you may need a more tailored investment strategy.

●      Additional Sources of Income – If you have pensions, rental income, or other assets, you may not need a fund that automatically becomes more conservative over time.

●      Preference for Transparency – Because TDFs invest in multiple funds, it can be difficult to track every individual holding. If you prefer direct control over your portfolio, a TDF might not be the best fit.

Where Should You Hold a Target Date Fund?

TDFs work best in tax-advantaged accounts such as:

●      401(k)s and IRAs – Tax-deferred growth can enhance long-term compounding.

●      529 College Savings Plans – Helps manage tuition savings with a gradual risk reduction strategy.

If you hold TDFs in a taxable brokerage account, they can create capital gains and dividend taxes. This may lower your overall returns.

Staying on Track with Your Investments

Although TDFs offer a hands-off investment approach, periodic check-ins are still important. Major life changes—such as a career shift, inheritance, or early retirement—may require adjusting your overall financial strategy.

Bottom Line

Target Date Funds provide a simple, professionally managed investment option. They work well for people with regular retirement plans or long-term savings goals. However, for those with unique financial circumstances, a more personalized strategy may be beneficial. Consulting a financial advisor can help ensure your investments align with your evolving needs and risk tolerance.

Would a Target Date Fund fit into your financial plan? Consider your long-term goals, investment preferences, and risk tolerance before making a decision.

Sources:

https://www.fidelity.com/learning-center/personal-finance/what-is-a-target-date-fund

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Target Date Fund: Target Date Funds are built for investors who expect to start gradual withdrawals of fund assets on the target date, to begin covering expenses in retirement. The principal value of the funds is not guaranteed at any time and will continue to fluctuate up to and after the target date. There is no guarantee the funds will provide adequate income at or through retirement. 

Target Date Funds are an asset mix of stocks, bonds and other investments that automatically becomes more conservative as the fund approaches its target retirement date and beyond. The funds are subject to market volatility and risks associated with the underlying investments. Risks include exposure to international and emerging markets, small company and sector equity securities, and fixed income securities subject to changes in inflation, market valuations, liquidity, prepayments, and early redemption. Diversification and asset allocation do not eliminate the risks of investment losses.