Target Date Funds: A Simple Premise, but Underlying Complexities
The allure of target date funds is simple: a single fund that provides a diversified portfolio and alters its allocation as shareholders approach the date when cash withdrawals will be taken. The promise of an “all-in-one solution” to investing for retirement is attracting both investors and employers. Yet, behind the simple appeal are complex strategies that offer more volatility and risk than these funds are perceived to have.
A target date fund is a mutual fund or an exchange-traded fund (FFFDX) is designed with a target date of 2020. An investor planning to retire in 2020, or within one or two years of that date, would consider investing in this fund.designed so that its portfolio strategy evolves as a specified date nears. The date is listed in the fund’s name—for example, the Fidelity Freedom 2020 fund (
In this article
- Shareholder Confusion
- Allocation Strategies
- Bear Market Volatility
- How Do You Choose?
- Alternatives to Target Date Funds
- Supplementing Target Date Funds
Share this article
As the target date moves closer, these funds change their composition to adjust for the level of risk the fund sponsor believes shareholders should be taking. The actual allocation and how often the allocation changes vary from fund to fund. Furthermore, at the target date, a fund can either adopt a final allocation or continue to evolve.
Target date funds are funds of funds. Instead of holding individual securities, they hold shares in other funds from within the same family. Fidelity target date funds, for instance, invest in other Fidelity funds. This allows the target date fund manager to focus on making allocation decisions instead of also having to consider what securities should be held. The downside is that an investor has no control over the funds chosen and is locked into the target fund’s family.
To read more, please become an AAII member or CLICK HERE.