The Target Date Fund

The Target Date Fund

Many 401(k) and 403(b) plans include Target Date Fund choices.  These generally list the fund company, a year (somehow related to your retirement year), and some kind of reference to Target Date or a brand name such as “Freedom Fund”, Fidelity’s target date funds.  There are some pros and cons to these funds, and some things you should know before you use them in your investment portfolio.  In this blog, I’ll describe some of the “pros” and “cons” of target date funds. Pros: 1.  They’re on “autopilot”.  You don’t have to worry about rebalancing or adjusting your allocation; that’s all done for you.  For younger participants, equity exposure can be 85% or even more of the total invested fund.  As the target date gets closer, the fund allocation automatically adjusts and may add more retirement-appropriate investments such as inflation-protected bonds, and may focus more on short-term bonds rather than longer-term bonds.  In general Target Date funds tend to get increasingly bond-allocated over time, presumably to provide more stability. The automatic nature of the Target Date fund is to me one of its most attractive features.  It can be particularly well suited to young, starting investors who are saving most of their money into a tax deferred option and simply want a strategy that’s appropriate to their time horizon. 2.  You may only need to pick one fund.  Target Date funds generally come in “five year increments”: for example, a Target Date fund from Fidelity will have the name “Fidelity Freedom 20XY Fund”, where XY is divisible by 5.  If you plan to retire in 2021, you would most likely pick the Fidelity Freedom 2020 fund, which Fidelity...