If you are like many investors, researching, selecting, monitoring, and adjusting your investments and asset allocation within your retirement plan can be a time-consuming burden. One possible strategy to consider may be a target-date fund.1
A target-date fund takes much of the decision making out of which asset classes to own, at which percentage weights, given your estimated retirement date. As that “target” date approaches, the manager of a target-date fund automatically adjusts your allocations to reduce your market risk.
Here are some basic facts about target date funds that you should know before you buy:
It is a popular option for retirement plans.Target-date funds are growing in popularity as investment options in qualified plans. In fact, as of December 31, 2016, 88% of target-date mutual fund assets were held through defined contribution plans and IRAs, according to the data from the Investment Company Institute. 2
It offers one-stop diversification and rebalancing.
A target-date fund is a single investment option that provides a diversified, professionally managed allocation to stocks, bonds and other investments.  The allocation is automatically rebalanced to a preset target allocation based on your retirement horizon and becomes more conservative over time.A target-date fund follows a more conservative “glide path” as your retirement approaches.
Let’s say you are 37 years old and expect to retire at age 67, or 30 years from now, so you consider looking at a target-date fund with that same 30-year time horizon. If you choose to invest in this fund, it might begin with an 85% allocation to stocks and 15% allocation to bonds. As you approach age 47, that allocation might gradually switch to more of a 70%/30% stock/bond allocation to reduce some of the stock market risk. This shift in asset allocation over time is known as the fund’s “glide path.”  As you approach your retirement age of 67, that glide path might incorporate a higher allocation to bonds and cash than stocks.
The glide path design can be very different from fund series to fund series.
Fund providers treat the allocation to stocks in target-date funds very differently. Some view continuing exposure to stocks past the normal retirement age of 65 as being less desirable for investors, and therefore eliminate or sharply reduce the allocation to stocks at age 65. Other fund providers view exposure to stocks as being important to continue “through” retirement age. Therefore, it’s important to incorporate your personal view of risk when evaluating target-date funds.
A target-date fund can be actively or passively managed, or follow a mixed approach.
Different managers can follow different asset management approaches.
Some invest all of their assets in actively managed mutual funds, and others in index funds. Some use a mix of active and indexed investments, including exchange-traded funds (ETFs).
A target-date is designed to be a standalone investment.
Some plan participants combine multiple funds in their retirement accounts to provide more diversification. A target-date fund is intended to be a plan participant’s sole investment within his or her plan. It’s important to note that selecting multiple options may result in a participant incurring more risk.
The general objective of a target-date fund is to generate the appropriate amount of asset accumulation to produce an adequate amount of retirement income over the course of your retirement. Of course, there can be no guarantee that any target-date fund will meet this objective.
- Please note the principal value invested in these funds is not guaranteed at any time, including at the specified target date.
- “Eighty-eight percent of target-date mutual fund assets were held through defined contribution (DC) plans, ICI finds”, PLANSPONSOR, March 23, 2017. https://www.plansponsor.com/Bulk-of-Target-Date-Funds-in-Retirement-Accounts/
- Diversification and rebalancing do not protect against loss or guarantee a profit. All investing involves risk, including loss of principal.
- These hypothetical asset allocation examples are intended solely to illustrate the concept of the glide path. They are not meant as investment advice.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.