4 min read April 29, 2022
What is a target date fund?

A target date fund uses a specific date in the future to allocate assets and spread out risk in order to manage your investment risk.

Individual working on excel spreadsheet in laptop

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 post-work goals?

One must-do on that list is regularly adjusting your asset allocation (your mix of investments) to match your proposed retirement age and risk tolerance. You can do this yourself, but it’s easy to neglect and may feel complicated. A possible solution? Target date funds: These retirement investment options do the work for you.

What are target date funds?

A target date fund, or TDF, is a fund with investments managed with a future date in mind—the target date when the investor is expected to retire. (You may also hear a TDF referred to as a life cycle fund, and the name of a fund can often be a giveaway for what that date is.) Many employer-offered 401(k) plans include the option to invest your savings in a TDF. For example, if you choose to invest in a 2065 target date fund, the fund is managed with the expectation that you will start withdrawing money around that date.

Graphic showing 2065 fund

Most TDFs include different types of investments, and the mix changes over time. The investment manager in charge of the fund uses the target (retirement) date as a guidepost to periodically adjust the diversification. They’ll also rebalance as necessary to maintain the preferred investment mix.

Generally, the further you are from retirement, the more risk you might be able assume. TDF investments reflect that, with generally a greater proportion of more conservative investments and fewer aggressive investments over time. “As you age, a TDF progresses with you,” says Tyler De Haan, director of business development in retirement solutions for Principal®.

Are all target date funds the same?

No—and even target date funds with the same date may have different strategies and investment mixes over time. How the investment mix changes over time is called a glide path.

    Graphic showing sample TDF allocations

    Why do some people like target date funds?

    If you spend a lot of time digging into the specifics of your personal risk tolerance and the investment choices offered by your company’s retirement plan, then you may prefer to manage your own investment allocation and a TDF may not be for you.

    But if you want to pick a date in the future and let the team of professional investment managers work for you, a TDF may be a good match. “It’s the ultimate hands-off approach,” De Haan says.

    Not sure what your preferred risk tolerance is? Take a five-question investor personality quiz to gain insight into your investment style.

    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.

    Graphic showing traget date fund retirement years

    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.

    Graphic showing target date funds payoff through retirement year

    Next steps

    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.

    Tyler De Haan is a Registered Representative with Principal Funds Distributor, Inc.

    Insurance products and plan administrative services provided through Principal Life Insurance Co. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker/-dealers. Principal Life, Principal Funds Distributor, Inc. and Principal Securities® are members of the Principal Financial Group®, Des Moines, IA 50392. Certain investment options may not be available in all states or U.S. commonwealths.