how a target date fund works
target date funds use a traditional portfolio management methodology to target asset allocation over the term of the fund to meet the investment return objective named by the year in which the investor plans to begin utilizing the assets target date funds are considered to be extremely long term investments for example in july 2017 vanguard launched its target retirement 2065 products given that the funds have a targeted utilization date of 2065 that gives them a time horizon of 48 years a fund s portfolio managers use this predetermined time horizon to fashion their investment strategy generally based on traditional asset allocation models the fund managers also use the target date to determine the degree of risk the fund is willing to undertake target date portfolio managers typically readjust portfolio risk levels annually risk tolerance over timefollowing the initial launch a target date fund has a high tolerance for risk and therefore is more heavily weighted toward high performing but speculative assets at the annual adjustment portfolio managers will reset the allocation of investment categories a target date fund s portfolio mix of assets and degree of risk becomes more conservative as it approaches its objective target date higher risk portfolio investments typically include domestic and global equities lower risk portions of a target date portfolio typically include fixed income investments such as bonds and cash equivalents most fund marketing materials show the allocation glide path that is the shift of assets across the entire investment time horizon the funds structure their glide rate to achieve the most conservative allocation right at the specified target date some target date funds known as through funds will also manage funds to a specified asset allocation past the target date in the years beyond the target date allocations are more heavily weighted toward low risk fixed income investments this is in contrast to other target date funds known as to funds which cease any modifications to asset allocation once the target date is reached today target date funds are only offered as mutual funds there are no equivalent etfs listed at the moment 1advantages and disadvantages of target date fundstarget date funds are popular with 401 k plan investors instead of having to choose several investments to create a portfolio that will help them reach their retirement goals investors choose a single target date fund to match their time horizon for example a younger worker hoping to retire in 2065 would choose a target date 2065 fund while an older worker hoping to retire in 2035 would choose a target date 2035 fund these funds mitigate the need for other assets some financial professionals advise that if you invest in one it should be the only investment in your plan this one and done approach is because additional investments could skew your overall portfolio allocation however after you ve picked a fund you have the ultimate set it and forget it investment of course the autopilot nature of target date funds can cut both ways the predetermined shifting of the portfolio assets may not suit an individual s changing goals and needs people grow and change and so do their needs 