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A target-date fund (TDF) is a diversified investment vehicle that is automatically rebalanced to invest in safer securities as you get closer to retirement. This approach can make it a reliable savings option for hands-off investors, but it has some drawbacks.
A target-date fund (TDF) is an investment vehicle designed to generate long-term returns while minimizing risk. Early in your career, a TDF primarily invests in growth-oriented securities like stocks. As you near retirement age, it is automatically rebalanced to invest more heavily in bonds, money market funds and other potentially safer investments.
TDFs are known as “funds of funds.” This means they invest in shares of various stock and bond funds.
TDFs are common investment options in most 401(k) plans. In fact, you may already be invested in one. A TDF is a common default investment in these plans. TDFs are also called lifecycle funds and target retirement funds.
TDFs are typically named after the “target year” that you plan to retire. For example, you may be invested in TDF 2056 if you plan to retire that year. However, fund companies typically roll out TDFs in five-year increments. So you should consider one named after the year closest to your desired retirement age.
When you open a TDF, it may invest 90% of its asset allocation or investment mix in domestic and foreign stocks. But as you get closer to retirement age, your TDF may shift more of its allocation to bonds. For example, TDF 2056 may invest 70% of its asset allocation in bonds and other fixed-income securities when that year comes. The progression is known as the fund’s glide path.
While TDFs are most commonly associated with retirement plans, there are many ways to invest in these funds.
Before you invest in a TDF, you should weigh the benefits and drawbacks.
A TDF may suit you if you want your portfolio to be professionally managed and rebalanced for you. Active investors may prefer to design their own portfolios by picking which securities to invest in through their retirement plans.
If you’re in between, you can invest in a TDF through your retirement plan while making your own trades through a taxable brokerage account.
TDF costs vary across products and how you invest in these funds. Here are some fees and expenses to look out for.
But keep in mind that TDFs invest in various funds, so you can be looking at multiple expense ratios. You can find the expense ratio of a specific fund by looking at the fund prospectus. You can access these when you review your account online or by requesting one from the provider.
Before you invest in a TDF through an investment account, compare your choices.
TDFs have grown in popularity within the past decade. But make sure you keep certain points in mind before you invest in one.
TDFs may be the right choice for passive investors who want access to a diversified portfolio that’s automatically rebalanced to reduce risk as they near retirement. But you can invest in a TDF through a brokerage account.
Fees and other factors may impact your returns, so make sure you compare brokerage platforms before you invest in a TDF.
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