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Target date funds: A set-and-forget retirement investing strategy

Target date funds may be a good match for you, helping balance growth opportunities with risk tolerance as you age and your goals change.
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In your day-to-day, you have all sorts of options to set it and forget it: an alarm to wake you, hints to help you drink water, an automated grocery list so you don’t forget milk. But what about reminders to ensure your retirement savings keep pace with your goals?

Those can feel more complicated. How do you make sure you have the right mix of investments to match your risk tolerance and your goal retirement date? It’s doable, but can involve time and more than a little uncertainty. One solution is target date funds.

What’s different about these types of funds, and when might they fit into your retirement saving strategy? Here are some insights.
What are target date funds?

A target date fund, or TDF, is a mix of investments grouped together in a fund to align with an expected retirement or need date.

Think of it this way: The further you are from retirement, the more opportunity you have for your retirement savings to grow or weather any market downturns. As you get closer you to retirement, you may prefer a safer mix of investments and perhaps slower growth. A target date fund is managed to mimic that same transition, moving from growth to more conservative. (TDFs are sometimes referred to as life cycle funds.)
Why do many TDFs have a number in the fund name?

If you see a TDF referred to as “TDF2065” that number is the date when the investor is expected to retire and/or begin drawing from the fund. (You may hear it referred to as a vintage year.) Generally, you’ll find TDFs spread out in five-year increments—2050, 2055, 2060, 2065 for example.

Example showing how a TDF is named.
How does a TDF investment mix change?

Most funds—TDF or not—include a mix of investments (called diversification) designed to help achieve as much growth as possible, or to reach a particular goal. In a TDF, in general, the proportion of more aggressive to more conservative shifts over time. (This is called a glide path.) The investment manager in charge of the fund uses the target (retirement) date as a guidepost to periodically adjust the TDF’s diversification. They’ll also rebalance as necessary to maintain the preferred investment mix.

Here’s a sample mix, showing the shift from mostly stocks (with a potentially greater opportunity for growth) to a larger percentage of risk-averse bonds and cash investments (when you have fewer years to work and build savings).

Comparison of possible investment allocations based on two ages.
Stocks
Bonds
Cash

For illustrative purposes only.
Can 401(k) or IRA retirement savings be invested in a TDF?

Many employers that offer employer-sponsored retirement savings, or a 401(k), may have a TDF as an investment option. In addition, an IRA may offer a TDF as an investment option.
Why might I want a target date fund for some of my retirement savings?

If you prefer to manage your own investment allocation, a TDF may not be a good match for all (or any) of your retirement savings.

But if you want to pick a date in the future and let professional investment managers work for you, a TDF may be a good match. “It’s the ultimate hands-off approach,” says Stanley Poorman, a financial professional with Principal®.
What is a to or through TDF?

You may hear TDFs referred to as both “to” and “through.”

A “to” TDF reaches its most conservative investment mix on the date of your retirement age. For example, a 2055 target date fund equals a conservative mix “to” or at the year 2055. At that point, assets are no longer re-allocated.

Investment allocation using “to” target date.
Stocks
Bonds

For illustrative purposes only.

A “through” TDF reaches its most conservative investment mix 10-15 years after the target date. For example, a 2055 target date fund equals its most conservative mix around the year 2065 or 2070.

Investment allocation using “through” target date.
Stocks
Bonds

For illustrative purposes only.

All that means is, you don’t have to choose a TDF that aligns exactly with the date you want to retire; you can, as with the example above, choose one that continues a conservative investment trend (and rebalancing) after your retirement or expected need date.
Do TDFs have fees?

All investments have fees, and TDFs are no different. If a TDF is more actively managed, it may have higher fees than those TDFs that simply mimic the investment mix of a stock index.

What’s next?

Is a TDF available through your workplace retirement plan? Log in to principal.com to see your options.

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About Target Date investment options: Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither the principal nor the underlying assets of target date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Asset allocation and diversification do not ensure a profit or protect against a loss. Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation.

Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets.

There is no guarantee that a target date investment will provide adequate income at or through retirement. A target date fund’s (TDF) glide path is typically set to align with a retirement age of 65, which may be your plan’s normal retirement date (NRD). If your plan’s NRD/age is different, the plan may default you to a TDF based on the plan’s NRD/Age. Participants may choose a TDF that does not match the plan’s intended retirement date but instead aligns more to their investment risk. Compare the different TDF’s to see how the mix of investments shift based on the TDF glide path.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.