What is a target-date fund (TDF)? (2024)

Target date funds (TDFs) provide a single, ready-made portfolio for a future savings goal like retirement or funding a child’s education. They seek to balance investors’ need to capture more return when there’s a long time leading up to their goal with preferences for greater stability and income potential as they approach the target date.

"Target date funds provide an all-in-one fund option that can help individuals stay invested, disciplined, and on track to help meet their financial goals,” says Angus Stewart, CFP^®, director of investment product management at Fidelity Investments.

Here's a closer look at how a target date fund works and what to consider before investing.

What is a target date fund?

Target date funds (TDFs) invest in a diversified mix of securities, including stocks, bonds, and other investments. TDFs are commonly used for retirement savings, with investors selecting a target date fund based on their target retirement date. For example, someone who’s 22 now and plans to retire at age 65 might choose a target date 2065 fund.

If you have a 401(k), you may already have a target date fund strategy that is managed with a specific retirement date in mind. They are frequently on the menu of investment options and 401(k) plans often use them as their default investment. Target date strategies can also be held in 529 college savings plans, where the target date is often the year the investor anticipates a child starting their higher education.

Target date funds are built around the idea that investing across different asset classes and securities and adjusting the mix of asset classes as an investor ages, may help grow and protect your savings. The longer an investor’s time horizon, the more they can try to capture strong long-term growth potential—so TDFs with target dates decades in the future typically hold most of their assets in stocks.

As investors near the time when they'll need to begin using their savings for income, they may want to protect more of their money from losses. To meet this objective, target date funds gradually become more conservative, increasing their allocations to bonds, cash, or cash equivalents. The mix of assets that adjusts throughout the life of the fund is known as the glide path.

"If you have difficulty sticking to a strategy or knowing where to start investing, a TDF can be a great jumping-off point,” say Paige Morandi, CFP^®, financial consultant at the Framingham, Massachusetts, Fidelity Investor Center.

Types of target date funds

Although all target date funds follow glide paths, different funds may use a variety of investment strategies. "Target date funds also come in a variety of management styles, and you have to take that into account,” Stewart says. For example, some funds are actively managed, others track benchmark indexes, and some may use a hybrid of the 2 approaches. Differences like these can affect the fund's costs, allocations, and risks.

3 investment approaches taken by target date funds

• ActiveAn active portfolio management team typically selects actively managed investments with an objective to outperform broad market indexes.
• PassiveA passive portfolio management team will select passively managed investments designed to achieve performance that is aligned with an index, like the S&P 500^® or Russell 2000.
• Hybrid or BlendA hybrid or blend portfolio management team uses a combination of the 2 options above, investing in actively managed investments when the team believes it makes sense and using passively managed investments in areas where they believe active management may not add much value.

In addition to the management style, retirement target date funds may be designed to go “to” or “through” retirement. A “to retirement” fund will generally reach its most conservative allocation at the target retirement date and maintain the allocation for the duration of the retirement period. “Through retirement” funds will continue to adjust the mix of stocks, bonds, and cash through the target retirement date, reaching their most conservative allocation at some point past the retirement date. It’s important to know the strategy used by a target date fund to help ensure that your investments are appropriate for your life and your plans.

Some funds may merge into another fund when they reach the target date. If this is the case with your fund, be sure to research the fund it will merge into—reading its prospectus can help determine if it’s in line with your goals and risk tolerance.

Target date pros

Target date funds offer many advantages. The biggest is that they can help people get invested in a diversified portfolio that is aligned with their investment horizon. This helps investors manage key risks that they may face over their lifetime: longevity risk, market risk, inflation risk, and the risk of deflation.

Longevity risk is the risk that you could outlive your money. Investing for growth potential can help ensure that your investments are at least keeping up with inflation and hopefully growing beyond that. Many target date funds maintain a healthy level of stocks up to the goal date and beyond, so a portion of your money has the chance to keep growing.

Market risk is the possibility an investment may lose value because of changes in the broader market, like in late February 2020 when the economy began shutting down as a result of COVID-19. While it’s impossible to completely remove market risk, TDFs help manage this risk by holding a wide range of investments. This diversification can help smooth out periods of volatility in the market. When one investment falls, others may rise—or simply not fall as much. Note that diversification and asset allocation do not ensure a profit or guarantee against loss.

Inflation risk is the possibility that rising prices for goods and services will reduce the purchasing power of an investor’s money. Target date funds’ allocations to stocks help manage inflation risk, because stocks historically have outpaced inflation over long periods. TDFs may also hold other investments that try to help protect investors during inflation, including real estate investments, commodities, and Treasury Inflation-Protected Securities (TIPS).

Target date funds' diversification strategies also protect against the opposite: deflation risk, or the risk that prices begin to fall as a result of reduced consumer spending and a slowing economy.

So are target date funds good?

Target date funds can be a great choice for investors with a known savings goal or target retirement date, who don't have the time or skill to construct a diversified portfolio. Some situations that may call for more personalization or customization include early or late retirement plans—for instance retiring before age 55 or after age 75—or if the investor, or their planning partner, has other assets saved for their goal.

For people with straightforward goals and needs, target date funds may be a low-fuss option. Target date funds provide ongoing professional investment management which includes research and asset allocation, regular rebalancing, and risk management as the goal date nears.

But as with any investment, there are important factors to consider before deciding to invest in a TDF. Fees can be one consideration but it's also important to evaluate your goals and the glide path of any prospective funds. Some funds with the same target date may become too conservative too early for your goals and situation while others may be too aggressive.

Also consider where to hold your TDF. A target date fund in a retirement account or 529 plan account enjoys tax-deferred or tax-free potential growth. Choosing to hold a TDF in a taxable account may trigger income and capital gains taxes on its investment returns.

Investors should be sure to factor in their overall investment preferences as well, Morandi says. For example, TDFs are often a fund of funds, which means a target date fund could invest in 10 different mutual funds which could all hold tens or hundreds of individual investments. That can make it difficult to quickly understand exactly what they invest in. "If your preference is to have full transparency into each position you own, a target date fund might not be the best option," Morandi says.

What’s more, some people may not need an investment strategy that gets more conservative over time. "If you have a source of additional income, you may have a higher capacity for risk," Morandi says.

Monitoring target date funds in investment strategies

Everyone should check in on their investments from time to time, even those who use target date funds. This is particularly true after a big life change, such as early retirement. Something like that could call for changes to financial plans, including whether to continue using target date funds. So while it may be tempting to think of target date funds as set-it-and-forget-it investments, “it’s important to continue monitoring how the fund fits into the overall investment strategy,” Stewart says.

Target date funds are a one-size-fits-most approach to retirement saving, which can be great for people with less complicated financial lives who plan to retire at a standard time. But for those who break the mold, it can be helpful to meet with a financial advisor to help evaluate your financial plan and adjust as needed.