Investing For Your Future Monthly Message
Barbara O’Neill, Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
What You Need to Know About Target Date Funds
Also known as lifecycle funds, target date funds are “all in one” portfolios that typically include three types of investment categories known as asset classes: stocks, bonds, and cash equivalents (e.g., money market funds). Their asset allocation weights (e.g., 50% stock, 30% bonds, 20% cash) automatically adjust and get more conservative (i.e., lower stock percentage) over time without any need for investors to take action.
Target date funds (TDFs) typically have a date in their name such as the “2040 Fund” or “2050 Fund” and investors chose a fund with a date that matches, or is close to, their expected year of retirement. Dates are spaced out at 5- or 10-year intervals (e.g., 2030, 2035, etc.), depending on the mutual fund provider. Most TDFs are “funds of funds” with underlying funds from the same fund family. Examples include Fidelity Freedom Funds, Vanguard Target Retirement Funds, and T.Rowe Price Retirement Funds.
TDFs were created in 1994 and have gained popularity in the last decade as a qualified default investment alternative (QDIA) for tax-deferred retirement savings plans such as 401(k)s and, more recently, Thrift Savings Plan (TSP) accounts for new federal employees. Some employees who are enrolled in employer investment plans fail to provide instructions for investing their deposits. In these cases, employers invest their plan contributions in the default investment. Investors also like TDF’s “low maintenance” style for savings outside of workplace plans.
Below are some key facts about target date (lifecycle) funds that investors need to know:
Do you want to know more about TDFs? The Cooperative Extension System held a 90-minute webinar on target date funds in 2015. To view the webinar video archive, visit https://learn.extension.org/events/2030.
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