How Does a Target Date Mutual Fund Work?

Personal Finance February 07, 2017 Print Friendly and PDF

With a target date mutual fund, investors simply need to pick a fund with a date at or near the year that they expect to retire. For example, there are funds with dates such as 2020, 2030, 2040, and 2050 in their title.

The fund manager will gradually change the asset allocation of the fund as time goes by so that, eventually, there will be a smaller percentage of the portfolio in stocks and a higher percentage in bonds and cash assets.The closer the fund gets to the target date, the more conservative the fund becomes.

Target date mutual funds are increasingly being offered as an option in 401(k) and 403(b) employer retirement savings plans plans and are often the "default option" when workers are enrolled automatically.They are also available from major investment companies for purchase in accounts outside of tax-deferred plans.

Investors should compare different target date funds, however, because funds vary their asset allocation weightings at different dates.

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.