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Education Center » Target Date Funds: Taking the DIY factor out of investing for retirement

Target Date Funds: Taking the DIY factor out of investing for retirement


Even if you enjoy the occasional do-it-yourself ("DIY") project around the house, you may not want to take that approach when it comes to something as important as investing for your future.

Choosing investments, balancing risk and potential return, deciding when to shift that balance as you approach a major milestone such as retirement ... it all takes a lot of time and know-how. If you’d rather have a way to invest that doesn’t require you to handle day-to-day investing decisions, it may be time to consider a target date fund (TDF).

Getting to know TDFs

TDFs are a popular choice,1 both for those participating in employer-sponsored retirement plans and for those investing outside of these plans. Known by such names as “life-cycle funds” and “age-based funds,” TDFs make it possible to invest in a diversified retirement portfolio with a mix of stocks, bonds, cash equivalents and other “asset classes” simply by choosing a single fund.

TDFs make it possible to invest in a diversified retirement portfolio simply by choosing a single fund.

Over time, the underlying investments in TDFs are adjusted by the fund manager so that your investment mix becomes more conservative (e.g., fewer stocks, more bonds) as retirement gets closer. That’s important because your asset allocation mix at age 30, when you’re focused on building your account balance over the long haul, could be too aggressive 30 years later, when you may need to live on the assets you’ve accumulated. TDF managers also will “rebalance” the asset mix in the fund periodically to maintain the fund’s intended strategy.

Choosing a TDF

So, what should you know about choosing a TDF? Let’s say you were born in 1975 and expect to retire at age 65, which will be in 2040. You’ll generally want to select a fund with a date as close to that “target” as possible. It might be named “Target 2040” or “Retirement 2040.” While that sounds pretty straightforward, you’ll also want to consider the following:

  • Is the fund compatible with your investing style? Funds with the same target dates may be invested differently. Be sure to consider whether a fund offers the growth potential you want today—and the balance of risk and return you’re seeking as you get closer to retirement. If you prefer a more aggressive mix, you may opt for a TDF with a later target date. For a more conservative mix, an earlier date may work.
  • “To” or “through”? A TDF’s “glide path” guides how and when the fund will shift to a more conservative mix of investments. For funds with “to” dates, the glide path ends during the target year, providing the most conservative investment mix at that time. Funds with “through” dates keep gliding after the target year, reaching their most conservative allocation at a later point in time.
  • Will you be content with a single retirement investment? Because a key benefit of TDFs is their ability to manage and adjust your asset allocation for you, they’re generally considered an alternative to selecting multiple investment options and creating your own retirement portfolio.

Staying tuned in

Choosing a TDF may feel like putting your retirement plan on cruise control. But, as with any investment, you’re still ultimately in charge. Your ability to realize your retirement dreams will be affected by other factors, including the performance of the markets and the amount you contribute to your retirement plan. It also will depend on your willingness to keep an eye on your TDF’s glide path, especially if you're getting closer to retirement—or if your retirement plans change over time. You may want to switch to a fund with a later or earlier target date if your TDF is:

  • Too conservative: maybe your goal is to boost retirement savings in your final working years.
  • Too aggressive: perhaps your goal is to preserve the assets you already have.

The target date for each TDF is the approximate date when an investor plans to start withdrawing the assets from his or her retirement account. The principal value of the fund is not guaranteed at any time, including at the target date. The fund is designed to become more conservative over time as the target date approaches.

Learn more and take action

  • Learn more about TDFs.
  • If your 401(k) is with Merrill and the plan offers TDFs in the investment menu, you can select a fund and monitor its performance at Benefits OnLine.

1Target date funds are now offered more than two-thirds of plans, according to the Plan Sponsor Council of America (PSCA) in the 62nd Annual Survey of Profit Sharing and 401(k) Plans, released December 2019.

Investing through your plan involves risk, including the possible loss of principal invested.

Diversification does not ensure a profit or protect against loss.