Target Date Fund
A Target Date Fund (TDF) is a diversified mutual fund that automatically adjusts its asset allocation along a "glide path" from aggressive to conservative as the target retirement date approaches, providing a hands-off investment solution for retirement savers.
Exam Tip
TDF = automatic rebalancing along glide path. QDIA in 401(k)s. "To" = conservative AT retirement. "Through" = continues adjusting. Same target year can have DIFFERENT allocations. NOT risk-free!
What is a Target Date Fund?
A Target Date Fund (TDF), also called a lifecycle fund, is an all-in-one investment designed to simplify retirement investing. Investors choose a fund with a target year close to their expected retirement date (e.g., 2045 Fund for someone retiring around 2045), and the fund automatically rebalances from growth-oriented investments to more conservative holdings over time.
Target date funds have become the default investment option in most 401(k) plans and are extremely popular due to their simplicity and automatic rebalancing.
How the Glide Path Works
| Stage | Years to Retirement | Typical Stock Allocation |
|---|---|---|
| Early Career | 30+ years | 85-90% |
| Mid-Career | 15-30 years | 70-80% |
| Near Retirement | 5-15 years | 55-65% |
| At Retirement | 0 years | 40-55% |
| In Retirement | 0-30 years | 25-40% (at landing point) |
"To" vs. "Through" Retirement Strategies
| Strategy | Description | Landing Point |
|---|---|---|
| "To" Retirement | Reaches final allocation AT target date | More conservative at retirement |
| "Through" Retirement | Continues adjusting AFTER target date | More aggressive through retirement |
| Industry Split | 73% "through" funds, 27% "to" funds | - |
Typical Target Date Fund Structure
| Component | Purpose |
|---|---|
| U.S. Stocks | Growth and capital appreciation |
| International Stocks | Diversification and growth |
| U.S. Bonds | Stability and income |
| International Bonds | Diversification |
| TIPS | Inflation protection |
| Short-Term Reserves | Near-term stability |
Advantages of Target Date Funds
| Advantage | Description |
|---|---|
| Simplicity | One-fund solution |
| Automatic Rebalancing | No manual adjustment needed |
| Age-Appropriate Risk | Adjusts as retirement approaches |
| Professional Management | Asset allocation expertise |
| Default QDIA | Qualified default investment alternative |
Limitations and Risks
| Limitation | Explanation |
|---|---|
| Not Risk-Free | Can lose value, especially near retirement |
| One-Size-Fits-All | May not match individual circumstances |
| Varying Glide Paths | Same target date, different allocations |
| Expense Ratios | Fund of funds can have higher costs |
| No Guarantee | Does not ensure adequate retirement income |
What CFP Candidates Should Know
| Topic | Key Point |
|---|---|
| QDIA Status | Qualified Default Investment Alternative in 401(k)s |
| Glide Path | Automatic shift from stocks to bonds |
| "To" vs. "Through" | Different landing points at retirement |
| Same Date != Same Allocation | Funds with same year can differ significantly |
| Not Guaranteed | Can lose money before and during retirement |
Expense Ratios (Typical Ranges)
| Fund Type | Expense Ratio |
|---|---|
| Index-Based TDFs | 0.10% - 0.20% |
| Actively Managed TDFs | 0.30% - 0.75% |
| TSP L Funds | 0.048% - 0.079% |
CFP Exam Focus
CFP candidates should understand:
- Target date funds are the most common QDIA
- Glide path = automatic stock-to-bond shift
- "To" funds are more conservative at target date
- "Through" funds continue adjusting after retirement
- Same target year does NOT mean same allocation (compare glide paths)
- Not risk-free - can lose value at any point
Study This Term In
Related Terms
Asset Allocation
Asset allocation is an investment strategy that divides a portfolio among different asset classes (stocks, bonds, cash) based on an investor's goals, risk tolerance, and time horizon to optimize risk-adjusted returns.
Monte Carlo Analysis
Monte Carlo Analysis is a retirement planning technique that uses computer simulations to model thousands of possible market scenarios, generating a probability of success (typically 0-99%) for a financial plan rather than relying on a single assumed rate of return.
Thrift Savings Plan (TSP)
The Thrift Savings Plan (TSP) is a defined contribution retirement savings plan for federal employees and uniformed service members, offering the same contribution limits as 401(k) plans with exceptionally low expense ratios and five core investment funds plus lifecycle options.