Target-Date Funds Decoded

Target-date funds (TDFs) have been the fastest growing area of the mutual fund industry over the last decade.

They are a special category of balanced or asset allocation mutual funds in which the asset mix in a fund’s portfolio is automatically adjusted according to a specific time frame—from a position of higher risk to one of lower risk as the participant ages or nears retirement.

TDFs (also known as lifecycle, age-based, asset allocation, or target-maturity funds) have higher equity allocations for younger clients, with the equity allocation declining as the participant nears retirement. This is based on the need to grow assets until retirement and then increase current income post retirement. The allocation to stocks versus bonds, referred to as the “glide path”, adjusts automatically over time. The ratio of the two asset classes at retirement is referred to as the “landing point.”

Ken Hoffman byline TDF equity allocation

TDFs satisfy so many needs within retirement plans that they have become exceedingly popular investment structures for numerous reasons:

  • They are simple.  If, for example, you are 39 years old and plan to retire at age 65, you have 26 years to retirement. It is easy to choose the 2040 target date fund series and have the fund manager adjust the asset allocation over time.
  • Their structure is convenient.  Broad data indicates that participants rarely examine their asset allocations or spend the time to fully understand the rationale of how to set their own allocation. A target-date fund does it for them. This investment structure diversifies the participant’s assets with one click of a mouse.
  • The participant receives professional management not only within the fund but also in the asset allocation decisions within the specific target-date series.
  • Generally, there are no additional fees for the asset allocation overlay.
  • TDFs have become the most widely used solution to having a QDIA (qualified default investment alternative) within a plan. Having a QDIA with a target-date series satisfies the Internal Revenue Service (IRS) regulation, effective December 24, 2007, for a safe-harbor plan under the Employee Retirement Income Security Act (ERISA) sections 404(c)(5) and 514(e)(3).


On the other hand, there are many drawbacks that must be taken into consideration when investing in target-date funds:

  • The concept of “set and forget” is naive and can mislead investors.
  • This investment structure does not guarantee that a defined contribution (DC) plan participant will achieve certain asset levels for retirement.
  • Depending on factors such as asset allocation, age and financial markets the participant may never accumulate enough money to fund their retirement.
  • Proprietary funds under the guidance of the TDF manager can pose a conflict. Generally, most fund families offer only their own funds in their target-date series, but this is beginning to change.

All TDFs are not created the same way. Each has its own guidelines, and it takes work to understand the nuances between target-date fund families. Retirement plan advisers and sponsors should understand that there can be enormous structural differences between them. Major differences between various target-date series can include:

  • The number of mutual funds within the TDF series;
  • How often funds are changed;
  • The timing of fund changes;
  • The investment strategy, style and approach of the fund managers;
  • The combination of active and passive (index) funds;
  • The managers’ differing views about risk tolerances for retirees;
  • The asset allocation over the life of the TDF; and
  • The equity allocation at the landing point.


The variations between target-date fund families in how they manage the funds’ glide paths as well as the points raised above can be significant. 

The glide paths for 13 different fund families, including seven of the largest TDF series, are depicted in the graph below. The data is graphed with the number of years to retirement (or post-retirement) along the X (horizontal) axis and the percentage allocated to equities along the Y (vertical) axis. 

As retirement approaches, the allocation to equities declines for each fund family. However, the initial allocations are different, the changes in allocations are different and the ending equity allocation is different for almost every fund series.

Ken Hoffman byline TDF equity glide path comparison

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.