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What You Should Know About Target-Date Funds

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Key Points

  • Target-date funds offer investors many benefits, including asset allocation, diversification, rebalancing and—perhaps most important—the discipline to stay invested.
  • Investors should understand that two funds with the same target date can differ significantly from one another in their allocations and other characteristics.
  • Differentiators include a fund’s glide path design, “to” versus “through” approach, ability to make tactical adjustments, and fees.

Investors seeking to simplify the management of their retirement portfolio often look to a single mutual fund or Exchange Traded Fund (ETF) that spreads their investments across multiple asset classes. One increasingly popular vehicle for doing so is a target-date fund—an age-appropriate portfolio that shifts its allocations over time to become gradually more conservative as the fund approaches its target date, relieving investors from the necessity of doing so themselves but keeping them invested to assist in potentially securing a successful retirement.

In just over two decades, target-date funds have amassed more than one trillion dollars in assets as of September 30, 2017, according to Morningstar Inc. It’s easy to see why. Target-date funds provide investors broad diversification. They relieve investors of having to make asset allocation decisions, and they rebalance regularly. They offer an alternative to the sub-optimal choices investors can be prone to make, such as putting the bulk of one’s retirement assets in a money market fund, or being too heavily weighted in one’s own company stock. Perhaps most important, target-date funds help investors avoid the urge to try to time the market, which more often than not can lead to disappointing outcomes. And fees are generally low, depending on the nature of the fund’s underlying holdings.

Having become a default option in many company 401(k) plans, target-date funds typically appeal to investors looking toward retirement, although they can be used for other goals earmarked for the future, such as funding a college education or saving for a home purchase. In any event, the premise behind the funds is simple: Investors select a fund closest to their expected retirement date (or other anticipated goal) based upon risk tolerance and personal financial conditions; the fund adjusts its mix of stocks, bonds and cash to become more conservative over time, as determined by its glide path. However, two funds with the same target date can differ significantly in their asset allocations and other characteristics. Here we highlight some key factors investors should take into account when evaluating target-date funds.

Key Differentiators Among Target-Date Funds

  • Glide Path Design
    A target-date fund’s glide path is the blueprint for its reallocation of fund assets as the target date approaches—and beyond, in some cases. While seemingly straightforward, glide paths can vary significantly across similarly dated funds. One may start out with higher allocations to riskier assets—albeit with the potential for greater gains—early on it its glide path and ultimately evolve to being more conservative at its target date. Investors can gain an understanding of such differences by reviewing each fund’s prospectus: Their glide paths will be graphically depicted, showing how each fund transitions from equities to fixed income investments over time. Such variations have the potential to significantly affect ending values.

  • “To” versus “Through”
    Although perceived as relatively safe due to their broad and ever-more-conservative asset allocations over time, target-date funds can sometimes be more aggressive than investors expect. This became particularly evident during the 2008 financial crisis, when many investors in 2010 target-date funds were shocked to suffer serious losses just two years prior to their goal year. This can be partially attributed to whether a fund applies a “to” or “through” methodology. Those applying a “to” approach generally reach their most conservative allocation at their target date, with no further shifts in allocations beyond that date. Those taking a “through” approach, on the other hand, continue to adjust their allocations beyond the target date, which often means they’ll still maintain a significant equity exposure even as they near their target date.

  • Tactical Adjustments
    Because most target-date funds are actively managed, in addition to simply rebalancing their asset allocations annually, many fund managers seek to adjust their balance of risk and reward as market conditions or outlooks change. By maintaining exposure to a broad range of complementary investment strategies, these managers can make tactical shifts across sub–asset class exposures to address macro-or micro-economic impacts as they arise in an effort to achieve improved performance. In addition, some take expected investor behavior into consideration to mitigate potential risks at various life stages.

  • Fees
    Fees should be an important consideration for target-date fund investors, because once they’ve opted into a fund in a company retirement plan, they are as likely as not to stick with it for a long time—possibly decades—over which time those fees can have a considerable impact on compounded returns. And fees can vary widely: from 0.08% to more than 1% each year.

Other Considerations

Investors should understand that target-date funds are not guaranteed to return a profit, and investors are subject to losses—even at or after the target date. Although some have wider latitude than others to adjust their glide paths based on changes to economic and market expectations, most won’t preclude losses during down markets. During the 2008 financial crisis, for instance, most such funds would have kept a 30-year-old aggressively invested, resulting in substantial losses; and in 2009 and 2013, kept a retiree mostly in bonds, missing out on two banner years for the stock market. In addition, most target-date funds rely on the assumption that fixed income investments are indeed safe, which is not always the case. And with today’s bond yields unusually low, it’s inevitable that interest rates will eventually rise, which could drive bond prices down and increase the potential for losses. However, their broad diversification and mix of asset classes, along with an expected long time horizon, are intended to minimize the chance of losses over the long term as well as ensure that investors are able to outpace inflation.

Investors should also understand that in most cases, target-date funds are constructed and managed as if they represent the entirety of an investor’s retirement funds, which is often not the case. In combination with other potential holdings, therefore, it’s possible that the assessed risk and portfolio allocation of a target-date fund may not fully meet an investor’s investment objective or retirement goals, engendering a potentially false sense of security.

And last, many investors are likely to adopt a “set and forget” mentality, assuming all is well with their retirement nest egg. This is never a good tactic. Instead, investors should keep a regular eye on their target-date funds. As the 2008 financial crisis taught us, things can go wrong in the market, and those paying attention have the greatest potential to make adjustments to avoid large losses.

Digging Deeper

Schwab offers resources to help investors research target-date funds. The Schwab Mutual Fund OneSource Select List® includes a number of target-date funds from multiple providers, including Schwab’s own family of funds. Schwab clients can also explore alternative target-date funds in detail by logging into schwab.com/research, clicking on the Mutual Funds tab and selecting Fund Screener. Enter “target” in the Keyword Search box. Mouse over a ticker, and you’ll see a snapshot of the fund; click on it to learn more the fund, including its investment strategy and fund profile (under “Fund Facts & Fees”); asset allocation (under “Portfolio”); and, of course, performance.


Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 1-800-435-4000 or by visiting www.schwab.com. Please read the prospectus carefully before investing. 
Target date funds asset allocations are subject to change over time. The principal value of the funds is not guaranteed at any time, and will continue to fluctuate up to and at times after the target date. There is no guarantee target date funds will provide adequate income at or through retirement. The funds are built for investors who expect to start gradual withdrawals of fund assets on the target date, to begin covering expenses in retirement.