What are Target Date Funds?

Target-date funds are mutual funds structured such that investors can optimize and grow assets in a specific time frame. For instance, if you plan to retire in 2030, you would pick a fund with 2030 in its name. The funds are carefully designed to addresses an investor’s financial needs at some future date. So, for example, most investors use these types of funds to fund their retirement. Other people use target funds to prepare for a future expense, say, a child’s college tuition.

Although target funds seem to guarantee some form of security to a person’s retirement plan, most people don’t care about the minor yet essential details of the funds. They just pick a fund, consistently deposit money into the fund, and forget about it until they reach retirement age. As an investor, it would be best to keep track of the fees, asset allocation, and potential risks. 

Performance and Asset Allocation for Target-Date Funds 

The primary thing you need to know about target-date funds is that not all funds are created equal. Different funds are tailored with unique strategies in mind, which can lead to varying desired outcomes. For example, if you look at the 5-year returns on 2025 funds, some funds had a compounding return of 10% per year. You’ll also notice that others boast compounding returns of less than 4% per year. So, if you primarily look at performance, the system will automatically promote the funds with the highest equity concentration in the aftermath of a bull market. Therefore, your selection criteria should not be overly dependent on the performance question without considering the glide path philosophy and fund composition. 

Target-Date Funds Glide Paths 

Target-date fund providers create glide paths that gradually decrease investment risk as retirement age approaches. However, the acceptable risk is usually subjective and dependent on other factors such as age or investment goals. A great example is how most funds are heavily weighted stocks and real estate when the target date is more than a decade away. In contrast, most people in or closer to retirement prefer minimizing risks and allocate a small portion of their portfolio to stocks. Glide Paths are classified into three philosophies: To Retirement, Through Retirement, and To & Through Retirement. 

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