targetdatefonder

A target date fund, often abbreviated as TDF, is a type of mutual fund or fund-of-funds designed to automatically adjust its asset allocation over time toward a more conservative mix as a specified target retirement date approaches. They are commonly used in defined contribution plans and individual retirement accounts as a simple, all-in-one investment option.

How they work: A target date fund follows a glide path, shifting from higher-risk assets like equities to lower-risk assets such as bonds and cash as the target date nears. The date is usually reflected in the fund’s name (for example, a 2050 target date fund). Some funds are designed to be maintained beyond the target date, while others aim to reach a more conservative allocation exactly at the target year.

Management and holdings: Most TDFs invest in a diversified mix of underlying funds, typically including domestic and international stocks and various fixed-income instruments. The exact allocations are determined by the fund’s glide path and can be either index-based (passive) or actively managed.

Costs and considerations: Target date funds charge ongoing management fees, which vary by sponsor and fund structure. Risks include sequence of returns risk near retirement, potential misalignment between the glide path and an investor’s risk tolerance, and possible underperformance in certain market environments.

Advantages and criticisms: TDFs offer simplicity, automatic rebalancing, and broad diversification in a single vehicle, making them popular as defaults in retirement plans. Critics note that a one-size-fits-all approach may not fit every investor’s tax situation, risk profile, or retirement goals, and that glide paths may not always be optimal.

History and prevalence: The concept emerged in the late 20th century and gained prominence in employer-sponsored plans during the 1990s and 2000s. Today, many providers offer a range of target date fund options for different retirement horizons.