Target-Date Funds: Retirement Investing on Autopilot

Most retirement investing advice eventually turns into homework. You pick an asset allocation, choose funds for each slice, rebalance yearly, and shift more conservative as you age. It is all correct, and it is also why plenty of people freeze up and do nothing, which is the one genuinely wrong answer.

The target-date fund exists for exactly this. It compresses the entire homework list into one decision, which is what year you will turn roughly 65.

How it works

A target-date fund is a fund of funds with a year in its name, like Target 2065 or Target 2050. Pick the one nearest your expected retirement year and it handles everything else. Inside, it holds a full diversified portfolio of US stocks, international stocks, and bonds, and it adjusts the mix automatically over time along what is called a glide path.

A 2065 fund today is aggressive, at roughly 90% stocks, because its owners have 40 years to ride out crashes. As the date approaches, it gradually shifts toward bonds and stability, all by itself. Nobody has to remember to get more conservative at 50, because the fund already did it. Rebalancing after markets move is also automatic. You set it up once and genuinely leave it alone.

They have become the default option in most 401(k) plans for good reason, and the research on them is kind of funny. Target-date investors often out-perform do-it-yourself investors in the same plans, not because the funds are brilliant, but because there is nothing to fiddle with, and fiddling is where returns go to die.

What to check before buying

Two things separate good target-date funds from mediocre ones. The first is fees. Index-based versions from the big providers charge around 0.1 to 0.2% a year, while actively managed versions can run 0.5% or more for no reliable benefit, and over a 40-year horizon that difference quietly eats a six-figure slice of a decent-sized balance. You can see it yourself in the investment fee calculator. The fund's expense ratio is listed right on its page, so look before you buy.

The second is that the date is not a contract, so it is fine to pick a later date than your age suggests if you want a more aggressive ride, like a 2060 fund instead of 2050, or an earlier one to be gentler. The year is just shorthand for a risk schedule.

The two classic mistakes

Mistake one is treating a target-date fund as one ingredient among many. People buy a 2055 fund and then add an S&P 500 fund, some bond fund, and a little of this and that for diversification. The target-date fund was already the whole meal. It contains those things in deliberate proportions, and bolting extras on just skews the mix it was managing for you. One target-date fund per account is the design.

Mistake two is judging it during a crash. When markets fall, a young person's target-date fund falls hard too, because it is 90% stocks and that is the job. Bailing out of it in a downturn defeats the entire purpose of an automatic strategy, which is having something that does not require your courage to function.

Who they are for

Beginners, busy people, anyone who wants to be a saver rather than a portfolio manager, and honestly most investors. The trade-off is a bit less customization and sometimes slightly higher fees than assembling index funds yourself, and tinkerers may eventually outgrow one. As a first decade of retirement investing, though, picking the year, automating the contribution, and ignoring it is about as strong as simple gets.

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This article is for general educational purposes only and does not constitute personal financial, investment, tax, or legal advice. Consult a qualified financial professional before making major financial decisions. See our Disclaimer.