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What's the Deal with Target Date Funds?

Target Date Mutual Funds…or just Target Date Funds…or TDF if you’d like it even shorter.  What are they, how do they work, and where can you get one.  You may already own one in your 401k and not even know it.

They’re more popular than ever and the go to choice in many 401k plans.  But what are they targeting and what’s the date all about.  

The date is the target.  The date is the year that you plan to start using the money in the fund.  For most folks, the date is the year they expect to retire.  But it could be a date for any financial goal, like saving for college or buying a home.

The farther you are from that date,  the more aggressive the mix of stocks and bonds inside the fund.  Every year, the mix gets a little more conservative, meaning the amount of supposedly less volatile bond funds increases, while the amount of stock funds decreases.  All without you having to do anything.  

And that’s why someone would use a Target Date Fund.  It’s simple.  It’s easy.  It’s puts the allocation on auto-pilot.  You don’t have to make any decisions.

That’s why it’s become the default choice in many 401k plans.  If you don’t pick something when you sign up…you may find yourself in a Target Date Fund.

The downside…you’re not like everybody else.  Just because you’re the same age or plan to retire the same year, doesn’t mean your goals, desires, and risk tolerance are the same.  You’re unique and have different things happening in your life than your co-worker in the cubicle.

That’s the trade off.  Simplicity and one size fits all versus a custom portfolio designed for you.  Target Date Funds are certainly not a bad choice.  Just know the limitations.