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The Basics of Target-Date Funds

The Basics of Target-Date Funds

June 23, 2021
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Why Plans Use Target-Date Funds?

If you're involved in managing your company's 401k plan, you've probably heard of or may even be using target-date funds. They're very popular and very common to have in a 401k plan. There are a couple of reasons for that. One is that they can meet the requirements for what's called a Qualified Default Investment Alternative or QDIA. If a QDIA lineup is vital to your plan design, then target-date fund analysis will be essential.

If you're not familiar with them, the way that target-date funds work is they have a specific target for retirement. For example, the fund may be a target 2025 fund. It's assuming that the participant will be retired age in the year 2025. The fund will automatically rebalance to become more and more conservative as that participant gets closer to retirement. How quickly that participant's balance starts going from more aggressive or stock-based to less aggressive or fixed income is called the glide path. Some funds are more aggressive in how their glide path is put together than others.

Pay Attention to Target-Date Fund Due Diligence

If you have a target-date fund as a QDIA in your retirement plan, most people will stay in that target-date fund. A recent study conducted by Vanguard indicated that 77% of plan participants participate in target-date funds (Vanguard, 2019). Most people will go into it as a default and not make changes. Now, not everybody's going to be that way. But, since the majority will be in there, you want to make sure that you've taken a good look at the target-date funds.

It's common for recordkeepers to give a price break if you use their proprietary target-date funds. That's not necessarily a bad thing, but you want to make sure that the decisions to use those funds are not soly based on recordkeeping price breaks. You want to make sure there are some excellent reasons for the use of those funds. For example, if they are cost-effective and meet the needs of the demographics of your employees. Because once again, most people are going to stay in those funds. It's essential to pay close attention to the due diligence put into that type of fund selection. 

The Department of Labor's Guidance on Target-Date Funds

The Department of Labor has issued some guidelines when it comes to target-date funds. Here are eight points directly from the Department of Labor regarding target-date fund selection directly from their website.

  • Establish a process for comparing and selecting TDF.
  • Establish a process for the periodic review of selected TDFs.
  • Understand the fund's investments – the allocation in different asset classes (stocks, bonds, cash), individual investments, and how these will change over time.
  • Review the fund's fees and investment expenses.
  • Inquire about whether a custom or non-proprietary target-date fund would be a better fit for your plan.
  • Develop effective employee communications.
  • Take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection.
  • Document the process.

(U.S. Department of Labor, 2013)

A few words stand out to me; being involved in this industry include process, review, communication, and document. There is no perfect answer to putting together a target-date fund lineup. But it is essential to pay attention to the thoughts that go into these decisions.


U.S. Department of Labor. (2013, February ). Target Date Retirement Funds . Retrieved from

Vanguard. (2019, June). How America Saves 2019. Retrieved from 


Mutual funds are sold by prospectus only. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund. The fund prospectus provides this and other important information. Please contact your representative or the Company to obtain a prospectus. Please read the prospectus carefully before investing or sending money.

There are some specific traits of target date funds that you need to be aware of.  Target-date funds are not guaranteed against losses. Funds with similar target dates can transition to more conservative investments in different ways and at different times. Combining target-date funds with other investments affects your overall asset allocation. Reaching the target date does not mean you’ve saved enough to meet your goal. Pick your target date carefully. Assess how much risk you are willing to take. Determine whether the fund will take you to or through retirement. Monitor the glide path of your target-date fund. Pay attention if automatically enrolled. Keep your "mixed" investments balanced.

Investing involves risk.  Loss, including loss of principal may occur. No investment strategy can guarantee positive results, nor can it protect against loss in periods of declining markets. Past performance does not guarantee future results.