Definition
A target date fund is a diversified investment vehicle whose asset allocation shifts automatically from a higher-equity mix toward a lower-equity mix as the fund approaches a specified target retirement year, and which is the dominant qualified default investment alternative in the defined contribution plan market.
Why it matters
Target date funds are the investment vehicle most defined contribution participants actually hold — either because they were defaulted in at enrollment or because they affirmatively selected the fund closest to their expected retirement year. Because the fund's shifting asset allocation runs on autopilot and covers the participant's entire working life, the specific glide path built into the fund shapes what balance and asset mix defaulted participants arrive at retirement with.
How it works
A target date fund is typically constructed as a fund of funds, holding a diversified mix of underlying equity, fixed income, and sometimes real asset or alternative investment funds. The fund's asset allocation is governed by a glide path — a pre-specified schedule showing what percentage of the fund is allocated to each asset class as a function of years to the target date — that the fund manager rebalances against on a scheduled basis. A 2050 target date fund held in 2026 will typically be allocated heavily to equities; the same fund line held in 2049 will typically be allocated more conservatively, with equity exposure reduced and fixed income and cash equivalents increased. Glide paths differ across fund families in two structural respects: the terminal equity allocation at the target date (with more conservative "to" glide paths reaching a static allocation at the target date and more aggressive "through" glide paths continuing to reduce equity for years or decades past it), and the pace of the descent. Target date funds became the dominant defined contribution default following the Department of Labor's inclusion of lifecycle funds as a qualified default investment alternative category in 2007; industry data from the Investment Company Institute reports target date fund assets exceeding $3 trillion as of the mid-2020s.
In practice
For an individual participating in a defined contribution plan, the target date fund closest to the participant's expected retirement year is often the plan's default and is frequently the participant's largest holding whether by default or by choice. The relevant questions for a participant are what the specific fund's glide path looks like at the participant's current age, what the terminal allocation is at the target date, and whether it is a "to" or "through" structure. A professional advising a participant with a target date fund can compare the fund's actual glide path against the participant's other assets and retirement income sources — a participant with substantial Social Security, a pension, or non-plan savings may be well or poorly served by the fund's default risk trajectory depending on total-portfolio circumstances. Plan fiduciaries selecting a target date fund line remain subject to ERISA prudence and monitoring duties in that selection and are expected to evaluate the fund family's glide path, underlying investment structure, and cost against alternatives on an ongoing basis.
Related terms
- Glide path
- Qualified default investment alternative
- Default investment
- Balanced fund
- Lifecycle fund
- Accumulation phase
- Decumulation phase
- Cost of income