Target date funds are a convenient choice for investors who want professional management for their retirement assets in a single, easy-to-use investment. Participants simply choose a fund that’s closest to the year they plan to retire.
Investment Goals Change as Participants Near Retirement
All target date funds have a glide path. The glide path represents the fund’s changing mix of investments, including stocks, bonds and cash equivalents, over time. When participants are further from retirement, the asset mix is more growth-oriented. As the participant’s target retirement date nears, the fund “glides down” to a more conservative mix of investments.
A Typical Glide Path is Diversified Across Stocks and Bonds
All target date funds reduce the amount of equity over time. However, funds that are managed “to” the target date put a higher focus on reducing volatility by becoming even more conservative as retirement approaches. This puts the responsibility of investment selection on retirees who withdraw their savings from the fund.
With life spans increasing, funds that are managed “through” the target date allow participants to continue using the same fund for decades in retirement. By maintaining a meaningful equity exposure approaching and throughout retirement, this can help participants manage the risk of outliving their savings.
Figure 1: A Static Approach
Figure 2: An Objectives-Based Approach
Some target date funds maintain a fixed allocation of growth and income stocks within the equity portion of their portfolios (see Figure 1). This static approach misses out on potential opportunities to reduce volatility in retirement. In contrast, target date funds that focus on investor objectives slowly shift from high-growth stocks to dividend-paying stocks as the retirement date nears (see Figure 2). Because dividends can help to cushion a portfolio during down markets, this approach allows the fund to maintain a greater equity exposure in retirement without necessarily increasing volatility.
Target date funds are subject to the risks and returns of the underlying assets. Although target date funds are managed for investors on a projected retirement date time frame, the funds’ allocation approach does not guarantee that investors’ retirement goals will be met. In addition, contributions to the fund may not be adequate to reach participants’ retirement goals.
Investors would be wise to weigh these different glide path features to determine which type of target date fund strikes the appropriate balance between appreciation and stability during their careers and in retirement.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.