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 (
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.
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