To tell you the truth, it’s probably more accurate to describe Target Date Funds (TDFs) as an investment strategy or schema than an asset or category of investment product. Most major banks have retirement plan services to offer major employers that want low-maintenance, low-risk 401(k) retirement plans for their employees. That’s where TDFs come into play.
Target Date Funds simplify investing for retirement by taking the guesswork out of allocating assets and helps to minimize stress related to long-term retirement planning. Having your savings going into TDFs basically means you never have to look at how your retirement plan is performing if you choose not to. No need to log-in every weekend or panic every time the stock market takes a big dip. Fund managers start out in more aggressive, capital generating equity funds if your target date is decades away. By the time you are near retirement your portfolios will have entirely migrated away from funds susceptible to volatility to a low-risk, capital preservation portfolio model. At retirement, your account will contain mainly US Treasury, money market and exchange-traded funds (ETFs). This is a description of what is called a “Glidepath” which ultimately progresses to the “Touchdown”, presumably the start of your retirement years.
As you might imagine, there are many investment advisors that offer a wide range of TDF-styled products. However, if you work for a company you might not have that many options. You can do all the research you want, but you most certainly won’t get to choose your own fund managers and products. You will have some control over your risk-reward appetite when you select the target retirement date of your funds.
Let’s assume your target retirement date is really 2035, but you have outside investments and/or anticipate an additional source of income at retirement. If you want to generate higher returns, you can simply set some target dates later than recommended. JPMorgan offers SmartRetirement 20xx funds which are staged in 5-year increments. If you look up the tickers on Yahoo! finance, the names of JPMorgan retirement funds list the target year at the end. Under the summary tab, you can review portfolio composition, historical data and many performance factors, such as dividends and price. Vanguard Target Retirement Funds managers maintain asset targets by automatically rebalancing your investments as they grow and experience periods of stagnation: Vanguard Target Retirement. Fidelity has a nice line-up of all their “Freedom Funds”, and their tickers appear right on their website: Fidelity Freedom Funds. Blackrock has target date products called LifePath Index 20xx Fund. This website is a great tool, because you can download a fee comparison, product sheet, and a Morningstar report, where you’ll find benchmark data. Check this one out for sure: Blackrock LifePath Funds. Northern Trust (NT) has a TDFs web page that starts out by informing the reader on the many intervening factors that they should know about when planning for retirement using TDFs. Northern Trust has a defined contributions (DC) approach, provides video content, and a primer on Glidepath innovation as well: Glidepath Research.
As you see, using target date funds give investors access to low-cost, professionally managed retirement planning. In a world of financial products that is seemingly endless, it can be overwhelming for most investors to try and learn about them all on their own. People lose sleep everyday over this sort of dilemma. It is not worth stressing over if all you need to know is how to best plan for retirement. The work is already done for you through your plan sponsor. The funds themselves must be ERISA approved and administered by a registered investment advisor (RIA) who has a fiscal responsibility for where your retirement dollars go.