What is a Target Date Fund?

Fortunately, the target date fund (or TFD) was created to deal with these questions so you don’t have to. It adjusts the balance of investments over time so you can “set it and forget it,” knowing your money’s being looked after. In fact, it's become a popular choice with around 69% of retirement investments in a target date fund, according to the Investment Company Institute.

In a nutshell…

A target date fund (TDF) is a popular type of retirement fund that gradually adjusts its investment strategy over time.
It focuses on higher risk investments when you’re young to maximize growth potential.
It focuses on lower risk investments as you approach retirement to protect your savings.

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What Is a Target Date Fund? (TDF)

A target date fund is a type of retirement fund that adjusts its investments over time, depending on how far you are from retirement.

This approach gives your savings more chance to grow while you’re young and there’s still time to recover any short-term losses. It also helps protect your savings from stock market uncertainty as you approach retirement - because no one wants to see their retirement savings fall just when they need it!

Target date funds are called TDFs for short because, well, it’s less of a mouthful. We will use TDF in this article for that very reason.

Who are target date funds for?

Target date funds are for people who don’t want to actively manage their retirement savings. It’s a set-it-and-forget-it type of fund that goes about its business in the background while you’re going about yours. With a TDF, you won’t be asked to choose the level of investment risk you want to take each year, and it won’t ask you what you want to invest in. If you want to consider enrolling in a TDF fund, PensionBee can help. Check out the details on our Target Date Fund.

If you want to take a more active role in your retirement savings, such as picking your own investments, a TDF fund may not be right for you.

How do Target Date Funds Work?

Target date funds work by automatically adjusting its mix of investments from higher-risk to lower-risk as you near retirement. As the name suggests, target date funds complete shifting to a lower-risk investment mix by a specific date.

TDFs are usually set five years apart. So you may find a 2045 TDF and a 2050 TDF, but not a 2047 TDF.

It’s also important to know that the funds aren’t created for you specifically. Rather, you enroll in the one that matches your planned retirement date - along with thousands of other people.

You’ll be able to take money out of your TDF once the target date is reached. So if you plan to retire in 2047, you’ll want to choose a 2045 TDF (otherwise you’ll have to wait another three years for the 2050 TDF to complete).

Let’s break down the process:

You enroll in a target date fund with a year that aligns with your planned retirement, either through your employer or directly with a fund provider like PensionBee.
Initially, the fund will include a larger amount of higher-risk investments to maximize its growth potential (for example, 95% higher-risk stocks and 5% lower-risk bonds).
Over time, the fund will gradually shift towards lower-risk investments like bonds and cash. This helps protect your savings from any stock market downturns.
By the time the target date is reached, the fund will have completed its planned shift to lower-risk investments. You can start taking money out of the account at this point and enjoy your retirement!
Depending on the type of account you choose, it may continue to adjust towards even lower-risk investments or hold its current position.

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Are Target Date Funds a good choice?

Target date funds can be a good choice if you want a hands-off and balanced approach to saving for retirement. Here are the pros and cons...

Pros of TDFs

Spend more time doing what you love! Joining a TDF for your target retirement year, the fund will automatically optimize your investments for growth and stability over time.
TDFs offer a sensible approach to saving for retirement, balancing risk with stability.
You won’t need to have a second ‘backup’ investment plan. TDFs are designed to maximize growth while you’re young and become more conservative over time for you.

Cons of TDFs

If you decide to retire early - and need to withdraw your money early - your TDF may still contain more higher-risk investments than you’d want at that stage.
TDFs are similar to other types of retirement accounts in that the value of your investments can go down as well as up.

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What Happens After Your Target Date?

So what happens when your target date fund reaches its... target date? First, you will be able to access your funds - but what happens next depends on whether it’s a To fund or a Through fund. Let’s get into that:

To TDFs: The final, most conservative investment mix will be reached by the target date (95% lower-risk and 5% higher-risk, for example). This is a more conservative approach, designed to protect your savings from stock market uncertainty as much as possible by the point you retire.
Through TDFs: The investment mix will continue to become more conservative beyond the target date. It may contain 80% lower-risk and 20% higher-risk investments at the target date, and continue to shift towards the final, most conservative mix by a later date, for example. This gives your retirement savings more opportunity to continue growing throughout your retirement but also involves more risk than a To TDF.

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Whether you choose a To or Through fund depends on how much risk you want to take on. If you want more certainty that your retirement savings are safe, consider a To TDF. If you want your savings to have more opportunity to grow while you’re retired, consider a Through TDF.

Setting up a Target Date Fund with PensionBee

Target date funds are a popular choice for millions of Americans when it comes to retirement planning, with around $3.5 trillion currently invested.

At PensionBee, we’re so confident in the value target date funds provide that we’ve made it our default investment plan! Our plans are managed by State Street Global Advisors, one of the biggest and most experienced investment managers in the world.

If you want a well-balanced retirement plan that will grow with you, view our investments page to get started.

FAQs

Are target date funds good for a 401(k)?

A target date fund can be a great choice for a 401(k) if you’re looking for a simple, hands-off approach to saving for retirement. Target date funds adjust their mix of investments from higher to lower-risk as you get older, boosting growth potential early on and shifting to a more conservative approach as you approach retirement. It’s a balanced approach that’s offered by around 96% of 401(k) plans.

Are target date funds passively or actively managed?

Target date funds (TDFs) can be passively or actively managed, or even blend the two approaches! Passively managed TDFs often have lower fees and are designed to track the market rather than beat it. Actively managed TDFs may have higher fees, but are also being actively managed in order to optimize results. The latter is a more aggressive approach that could pay off if things go right - but there’s also greater risk of underperforming.

What are sustainable target date funds?

Sustainable target date funds are a type of retirement fund that invests in companies and assets that contribute towards reducing climate change. The investment approach focuses on higher-risk, higher-reward opportunities while you’re far from retirement and lower-risk, more stable opportunities when you’re approaching retirement.

What happens to target date funds after the target date?

Once a target date fund (TDF) reaches its target date, one of two things will happen. Either it will reach its most conservative investment mix by the target date and keep it there for the remainder of your retirement (called a To TDF). Or it will continue to become more conservative after the target date has been reached (called a Through TDF). To TDFs are suitable for people who want their retirement savings protected as much as possible, while Through TDFs are more suitable for people who may be less reliant on their retirement income and want to give their savings more opportunity to grow.

How often do target date funds rebalance?

There’s no set rule for how often target date funds are rebalanced. Some providers will adjust the mix of investments each year, while others will do it on a more ad-hoc basis.

What happens when target date funds mature?

When target date funds (TDFs) mature, you’ll be able to start taking out your savings. Depending on the type of TDF you have, it may reach its most conservative mix of investments at the point you retire or it may continue to adjust its investments throughout your retirement.

When did target date funds start?

The first target date funds (TDF) were introduced in the early 1990s by Barclays Global Investors. Vanguard followed in 2003, becoming one of the most popular providers of TDFs. In 2024, PensionBee launched its online TDF, allowing customers to conveniently consolidate their 401(k)s and IRAs into one diversified plan.

Do target date funds charge fees?

Yes, target date funds (TDFs) do charge fees. The fee is typically a percentage of your invested savings, called an expense ratio. This covers the admin and management costs. Passively managed TDFs usually have lower fees than actively managed TDFs.

Is a target date fund an IRA?

Not exactly. A target date fund is a type of retirement fund that can be chosen when you set up an IRA, but it’s not an IRA itself. You can also set up a target date fund through your 401(k) too.

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