What Is a Target-Date Fund — In Plain Words

This page is educational only. It is not financial advice.

Short answer

A target date fund is an investment fund that holds a mix of investments. The mix changes over time. That is the short form of what both sources in the Sources box state.

As the Investor Bulletin states it: target date funds are investment funds that hold a mix of investments, such as stock, bond, and other investment funds. They are designed to make investing for retirement or other goals more convenient by spreading money among different investments (diversification) and by changing the investment mix or asset allocation over time.

As the Investor.gov product page states it: target date funds are often mutual funds or exchange traded funds (ETFs). They hold a mix of stock, bond, and other investment funds. Target date funds are designed to be long-term investments for individuals with particular goals in mind, such as retirement or paying for college.

This page is about the fund product itself — what it holds, how its mix changes, what it costs, and what it does not promise — using only the two sources named in the Sources box. It prints what those sources state, in plain words. Where the two sources word a point differently, each wording is stated in its own labeled passage.

What this page covers

This page explains, from those two sources only:

• What a target-date fund is
• What the date in the fund’s name means
• How the mix of investments changes over time
• What the glide path is, and the difference between a “to” glide path and a “through” glide path
• The two layers of fees
• Why funds with the same target date can differ a lot, and why a target date is not a guarantee
• Where a fund’s own glide path and fees are stated

What a target-date fund is

Investor Bulletin wording: target date funds are investment funds that hold a mix of investments, such as stock, bond, and other investment funds.

Product page wording: target date funds are often mutual funds or exchange traded funds (ETFs). They hold a mix of stock, bond, and other investment funds.

The bulletin also states how the fund is built: a target date fund is typically a fund of funds. That means the fund’s investment portfolio is made up of shares of other investment funds and not individual stocks or bonds. The investment strategies of these underlying funds are in different asset classes, from equities (stocks) to fixed income assets like bonds, and have different risk/return profiles.

The bulletin states that the target date fund’s adviser shifts the target date fund’s assets among the various underlying funds over time, consistent with the fund’s own investment strategy.

Distribution fact (product page): target date funds are often available through 401(k) plans.

The date in the name

The two sources word the naming point slightly differently, so each is stated in its own passage here.

As the Investor Bulletin states it: the year in the name of a target date fund typically refers to the fund’s target date. For target date retirement funds, this date would be the year you expect to retire. For example, a fund called “Lifecycle 2060 Fund” would be designed for individuals who intend to retire in or near the year 2060.

As the product page states it: the name of the fund often refers to its target date. For target date retirement funds, this date would be the year you expect to retire. For example, a fund called “Lifecycle 2060 Fund” is designed for individuals who intend to retire in or near the year 2060.

Put in plain words, the date in the name is a year — the fund’s target date — and for a retirement fund that year is the year the investor expects to retire, as both sources state it.

How the mix changes over time

The two sources describe the change in two wordings, so each is stated in its own passage here.

As the Investor Bulletin describes it: unlike other mutual funds and ETFs, target date funds rebalance or change the fund’s mix of investments over time in a way that is typically intended to become more conservative as the target date approaches. The investment adviser typically shifts the fund’s investment mix from being more heavily focused on stocks (generally a higher risk of loss) in the beginning to being more weighted toward bonds (generally a lower risk of loss) as the target date nears. The bulletin also states that, in a target date fund, the fund’s investment adviser typically takes care of shifting the investments from higher return (and higher risk) to lower return (but lower risk) as the target date approaches.

As the product page describes it: most target date funds are designed so that the fund’s mix of investments changes in a way that is intended to become more conservative as the target date approaches. Typically, the funds shift over time from a mix with a lot of stock investments in the beginning to a mix weighted more toward bonds.

The glide path: “to” compared with “through”

The bulletin states that the timing of the shifting — from investing more in stock funds to more in bond funds as the target date nears — is called the glide path.

The bulletin states that there are two types of glide paths — “to” and “through” the target date:

• “To” glide path (bulletin): funds with a “to” glide path shift their investment mix just until the target date and generally not past that date.
• “Through” glide path (bulletin): funds with a “through” glide path shift their investment mix up to and past the target date.

The bulletin also states that funds with a “to” glide path typically switch to more conservative investments earlier than funds with a “through” glide path. That means that at many points along the glide path a “to” fund is invested in lower return and lower risk investments than a “through” fund.

Put in plain words: a “to” fund reaches its most conservative mix at the target date and stops shifting there, while a “through” fund keeps shifting its mix past the target date, as the bulletin describes the two types.

Fees: two layers

The bulletin states the fee point in its risks section: since a target date fund often invests in other funds, fees may be charged by both the target date fund and the underlying funds.

Put in plain words, the cost comes in two layers: the target-date fund’s own fees, plus the fees of the underlying funds it holds.

The bulletin states the size point this way: target date funds with the same target date may charge different fees, and even small differences in fees can translate into large differences in returns over time. The bulletin also states, in its fees passage, that even small fees can have a large impact on an investment over time.

Risks: same date, different funds, and no guarantee

Funds with the same target date can differ a lot. The bulletin states this point in bold in its risks section: even target date funds with the same target date often have very different investments and different performance/returns. The bulletin gives three reasons:

• Different investment strategies and risks. Target date funds with the same target date may have different investment strategies and levels of risk. The mix of investments all along the glide path may be more conservative or more risky than other funds. These variations may occur before the target date, and also at the target date and after it.
• Different glide paths. Target date funds with the same target date may have different glide paths. This means that the mix of investments gets shifted to more conservative investments at different times or at a different rate.
• Different fees. Target date funds with the same target date may charge different fees, with fees charged by both the target date fund and the underlying funds, as stated in the fees section above.

The bulletin also states that the fund is not a guarantee of income: target date retirement funds structured as mutual funds and ETFs do not guarantee that an investor will have sufficient retirement income, or a specific level of retirement income, at or after the target date.

The bulletin’s risk wording for the mix itself is stated in the glide-path section above: stocks carry generally a higher risk of loss, and bonds generally a lower risk of loss. Reaching the target date, on the bulletin’s wording, does not by itself guarantee sufficient retirement income.

Where a fund’s own glide path and fees are stated

The bulletin states that a fund’s available information includes its prospectus and most recent shareholder report, and that this information is also in the fund’s filings on the SEC’s EDGAR database, available from an investment professional, or directly from the fund free of charge.

The bulletin states the fee-table point this way: the fee table in the target date fund’s prospectus will show both — the costs for the target date fund and for any funds in which the target date fund invests.

The bulletin also states the timing fact behind the “to” and “through” difference: funds differ in when the fund will reach its most conservative investment mix. That timing is part of the fund’s own glide path, as described in the fund’s own documents.

This page is educational only. It is not financial advice.