Aiming at Target-Date Funds

Target-date funds are increasingly popular in workplace retirement plans, where they are often the default option for new employees. A 2014 study found that 15% of all 401(k) assets — including 32% of assets for recently hired plan participants — were invested in target-date funds.1

These funds are not limited to new hires. Overall, more than two out of five 401(k) participants have at least some assets in a target-date fund.2Investors also hold target-date funds in IRAs and other types of accounts.

One-Stop Asset Allocation
The appeal of target-date funds is their apparent simplicity. They provide a professionally managed mix of assets — typically funds comprising stocks, bonds, and cash alternatives — selected for a specific time horizon.

The concept is to provide a balanced portfolio in a single mutual fund. Asset allocation is a widely accepted method to help manage investment risk; however, it does not guarantee a profit or protect against investment loss.

Although target-date funds offer investment simplicity, they are quite complex in the way they work. So whether you already own a target-date fund or may purchase one in the future, it’s important to understand the basic principles.


Anatomy of a Fund
The target date, which is typically included in the fund’s name, is the approximate date when an investor would withdraw money for retirement or another purpose, such as paying for college. An investor expecting to retire in 2040, for example, might choose a 2040 fund. As the target date approaches, the fund typically shifts toward a more conservative asset allocation to help conserve the value it may have accumulated.

This transition is driven by a formula called the glide path, which determines how the asset mix will change over time. The glide path may end once the target date is reached or continue to shift assets after the target date. Funds with the same target date may vary not only in the glide path but also in the underlying asset allocation, investment holdings, turnover rate, fees, and fund performance. Variation tends to be greater as funds near their target date. In 2014, funds with a 2015 target date had stock allocations ranging from 25% to 78%, whereas stock allocations in 2045 funds ranged from 80% to 100%.3

A target-date fund could be a sound retirement savings method, but keep in mind that choosing a target-date fund does not guarantee that you will have sufficient funds for retirement on that date. The principal value of a target-date fund is never guaranteed (before, on, or after the target date).

The return and principal value of all mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1–2) Employee Benefit Research Institute, 2014
3) Morningstar, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.