Target date fund

What a target date fund is

Target date funds come in a series, usually in five-year steps such as 2050, 2055 and 2060. Each fund follows a “glide path” that reduces risk over time. Some reach their most conservative mix at the target year, and others keep adjusting for years after it. Most are built from other funds and charge an expense ratio.

Why it matters to employers

Because target date funds are often the default for automatically enrolled employees, they tend to hold a large share of plan assets. The Department of Labor’s guidance for fiduciaries says to set up a process for comparing and selecting the funds, review them regularly, understand the underlying investments and the glide path, review the fees, and document the decision.

Example

An employee born in 1990 expects to retire around 2055 and is defaulted into a 2055 fund. Today the fund is mostly in stocks, and by 2055 it will hold much more in bonds. Two 2055 funds from different managers can hold quite different stock percentages on the same date.

Common mistakes

• Assuming all funds with the same year are alike.

• Never checking whether the glide path suits your workforce.

• Employees splitting money across several target date funds, or believing the fund cannot lose money at the target date.