When it comes to saving for retirement, one of the biggest hurdles you might face is figuring out what to invest in.
A target date fund is an easy solution that helps take the guesswork out of investing.
These funds are long-term investments that can help you start saving for a future goal — like retirement — without having to build a portfolio or come up with your own investment strategy.
What Is a Target Date Fund?
Target date funds (TDFs) are portfolios designed around a specific financial goal, like retirement savings or funding a child’s education. They're defined by a set timeline, or target date.
The fund is specifically calibrated with your goal in mind — as time goes on, the fund’s asset allocation is automatically adjusted to protect the nest egg you’ve built for yourself.
TDFs are popular because not only are they simple, but they're also well-diversified. Each TDF consists of different securities, such as stocks, bonds, and mutual funds. The mix of assets varies based on your personal risk tolerance and the date you expect the fund to mature.
To manage risk, the fund gradually rebalances toward lower-risk assets like bonds and cash equivalents. For example, a 2070 target date could feature a greater stock allocation compared to a 2040 target date.
While TDFS aren’t completely risk-free, they do make it easier for passive investors to mitigate risk.
How Do Target Date Funds Work?
Think of a target date fund as a fund within a fund.
It typically operates as a mutual fund that invests in other mutual funds. This simplifies diversification, since the fund is invested in hundreds of assets simultaneously.
Over time, the TDF rebalances to protect its value. In the beginning, the fund might be heavily invested in growth assets, but later on, as it approaches the target date, it will shift to safer income-generating assets like bonds.
Some TDFs are passively managed, while others are actively overseen by a portfolio manager.
A glide path determines the allocation of assets in a TDF. This is a tool that anticipates risk exposure throughout the fund's lifetime and helps portfolio managers adjust the asset allocation accordingly.
READ MORE: Active vs. Passive Investing: Which Is Best?
Target date fund fees
TDFs charge fees, known as the expense ratio. It represents a percentage of your total investment. Fees can vary and some funds may have higher fees based on who manages them.
For example, Fidelity’s Freedom 2060 Fund charges an expense ratio of 0.68%, while Vanguard’s Target Retirement 2060 Fund charges a 0.08% expense ratio.
Check the fee structure in addition to the fund’s asset allocation to ensure you’re getting the highest return for your investment.
Types of Target Date Funds
You have three main options for TDFs: active, passive, and blended.
- Active funds are managed by a team of professional portfolio managers. Using the fund’s glide path and stated objective, they’ll try to beat the market.
- Passive funds are a way to invest on autopilot. Similar to mutual funds or exchange-traded funds (ETFs), these target date funds usually track a major index like the S&P 500.
- Blended funds use a combination of both. A team manages the fund and chooses how to execute trades to maximize returns for investors.
There are also different funds for different savings goals. Retirement TDFs are the most popular, but you can also choose a TDF for a different goal, like saving for a child’s future education.
For example, Vanguard offers Target Enrollment Portfolios that you can invest in through a 529 college savings plan.
Other types of TDFs include “to” and “through” funds. This is especially important when it comes to choosing a fund for retirement.
- “To” funds are designed to get you to retirement by using a more conservative asset allocation.
- “Through” funds continue to change the asset allocation past your anticipated retirement date, to continue generating returns.
Pros and Cons of Target Date Funds
While target date funds can make for a hands-off approach to planning for retirement, there are a few things to consider.
Pros
- Well-diversified across different asset classes
- Automatically rebalance to mitigate risk
- Pre-built portfolio makes target funds an easy option for new investors to build
Cons
- Funds may differ in their asset allocation and rebalancing strategy
- Some have higher expense ratios
- Since the funds tend to be conservative, you can miss opportunities to capture broader market growth
Tips for Choosing a Target Date Fund
1. Set your date
Start by selecting a fund that aligns with your expected retirement date.
If you have the option to invest in a TDF through your employer-sponsored 401(k) and plan to retire when you’re 65, look for a fund that is closest to your expected retirement date.
2. Know your risk
You’ll also want to evaluate your personal risk tolerance. Some funds may have an asset allocation that is more conservative than you prefer. While this can help your nest egg once you reach retirement, it can limit your growth potential early on.
Review a fund’s asset allocation to make sure it aligns with your goals, risk tolerance, and expectations.
3. Choose your management style
Decide on the management approach you prefer. Actively managed funds try to beat the market, but they’re not always successful. You may pay higher fees but have similar results to a lower-cost passively managed fund.
Be mindful of the structure of a TDF to avoid incurring more losses than actual gains from it.
FAQs
Are target date funds good?
Target date funds can be good for new investors or investors who don’t want to hand-pick which assets to include in their portfolio. Since TDFs are pre-built, you don't need to exert a lot of effort to create a well-diversified portfolio.
How risky are target date funds?
Target date funds aren't entirely without risk, but their design aims to mitigate it. The asset allocation usually includes low-risk assets, like bonds, and changes over time to protect the portfolio’s value.
You can review a TDF’s asset allocation on the portfolio manager’s website to learn more about the fund’s possible risk exposure.
Why would someone buy a target date fund?
There are a variety of reasons why someone might choose to buy a target date fund. They simplify the process of saving for retirement, allowing you to invest on autopilot.
Due to their well-diversified nature, most TDFs help mitigate the risk that investors might face when individually selecting assets for their portfolio.
TL;DR: Are TDFs Right for You?
Target date funds are like a built-in autopilot for your retirement savings — they handle diversification and automatically get more conservative as you get closer to your goal. You don’t have to constantly rebalance or stress about picking the right mix of stocks and bonds.
If you want to invest without obsessing over it, a TDF can be a smart, low-effort option. Just make sure you check the fees, glide path, and how aggressive the fund is so it actually fits you — not just your retirement date.
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