Target Date Funds: A Simple Premise, but Underlying Complexities

by Charles Rotblut, CFA

Target Date Funds: A Simple Premise, But Underlying Complexities Splash image

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 (ETF) 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 (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.

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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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at


Gordon Robinson from North Carolina posted about 1 year ago:

I agree with relatively high stock allocations of Target Retirement Funds at the age of 65 such as the Vanguard Target Retirement Fund 2015 with 56% stock because of increased life expectancy and inflation.
However, I am a Boglehead ( follow and contribute to the blog site, people who follow John Bogle, founder of the Vanguard Group) and many of them are very risk averse, not only in believing in only index funds but also in asset allocation using bonds ("age in bonds" up to 80% at 80.) Many would not consider entering retirement at 65 with a 60% stock portfolio. When all the Target Retirement Funds you used as examples went down 38 - 43% in 2008, how do you ameliorate these peoples fear of volatility and get them to "stay the course" in a Target Retirement Fund?
That exact topic is the topic that is the subject of the Coastal Carolina AAII meeting on Wed Oct 10. Gordon Robinson

Charles Rotblut from Illinois posted about 1 year ago:

Vanguard announced this morning that it is changing the indexes it tracks for many funds, including its target date funds. The company is hoping to reduce transaction costs by doing so.

The press release can be read on Vanguard's website at:


Michael M from Illinois posted about 1 year ago:

I'm 85. How do I find out how I would have made out if I used a Fidelity Freedom Fund if I had started at 62 when I retired?
Where should I go now?

James Selva from New York posted about 1 year ago:

Iam in the vanguard retirement income target fund witch has 65% bonds with a turation of 5.5 years the total bond fund could really get hit with a loss if a bond bubble happens as many are saying iam thinking about moving to the 2015 target with more stocks? will the income target fund lower their bond duration?

Melvin Rosen from Wisconsin posted about 1 year ago:

Vanguard's target retired fund is 30%stock allocation.
One can easily duplicate their allocations concepts as suggested but this is difficult with less choices in retirement funds.
Suggest that you roll-over your fund immediately on retirement to an account where you can control allocations. The involvement keeps you thinking and exercising your mind.

Earl Mitchell from California posted about 1 year ago:

I wanted to see how well a target dated fund did versus a S&P 500 and Small Cap fund over the same period of time. So I moved IRA money into all three after around 2009. As of last month the target dated fund gained 22% versus 50+% for S&P and 60+% for Small Cap. I ended that experiment and moved my money out of the target dated fund. No thanks.

One thing I'd be worried about with target dated funds is that the company will funnel your money into their lower performing funds or ones that have higher expense ratios. It's the same kind of game they played with limited number of funds they sometimes offer for company 401K plans (i.e. only giving you the choice of their dog funds not the best ones).

Vaidy Bala from posted about 1 year ago:

After reading this article, I understand the fund gives about less than 3 % return overall (bull or bear market) with a minus of about 1.5 % of taxes, the returns is my cash flow. Is it worth all this bother?

Fletcher Cole from New Hampshire posted about 1 year ago:

Does the target fund investor incur two sets of fund expense ratios? If the target fund has an expense ratio, and the target fund invests its assets in other mutual funds within the fund family, it would seem as though the fees are layered. Can anyone comment on this?

Charles Rotblut from Illinois posted about 1 year ago:


Since target date funds are comprised of funds from the same fund family, the answer is no. You are paying a single fee to the fund family.


Tony Hausner from Maryland posted about 1 year ago:

what puzzles me is that most if not all target funds are inappropriately structured as far as i understand. They all favor large cap over small cap and growth over value, whereas research favors the opposite over the long term. even the federal tsp is this way. what am I missing.

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