Target date funds (TDFs) have become an increasingly popular tool for retirement savings. At the end of 2012, $485 billion in assets was invested in these mutual funds nationwide, up 29 percent over the previous year.1 Part of this growing popularity stems from their ease of use in retirement planning.
Target date mutual funds typically invest in a diversified mix of stock and bond funds based on the investor’s time frame. Investors pick a TDF based on its target date–typically the year they plan to retire–and the fund managers then automatically adjust the portfolio over time to maintain an appropriate mix of stocks and bonds as the target date approaches.
“Target date funds are an easy way for investors to have a balanced portfolio, without doing the balancing themselves,” says Anthony Webb, senior research economist at the Center for Retirement Research at Boston College.
Target date funds make it easy to have a diversified and well-balanced portfolio that automatically adjusts over time to reduce the risk of short-term stock market volatility. That’s a risk most soon-to-be retirees would rather avoid.
“When investing yourself, you have to decide the asset allocation, which stocks and bonds to buy, and when to rebalance," says Webb. "TDFs make those decisions for you."
For example, a TDF with a target date 20 years away would typically hold a majority of its assets in stock funds, to take advantage of the stock market’s long-term growth potential. As the target date approaches, the fund’s managers change the asset allocation to create a more conservative mix of investments. This might mean shifting funds from stocks to bonds and cash. Different TDFs take a different approach to the reallocation process, so it makes sense to sit down with a financial advisor to consider several options.
Though convenient, TDFs can have some downsides. The funds can sometimes be too “one-size-fits-all,” says Webb. A particular TDF might be more conservative than you’d prefer, and that can lead to missed opportunities, he explains. For instance, automatic rebalancing can shift your portfolio away from investments that are performing well.
It’s also important to examine the underlying fees of the mutual funds in the TDF portfolio, says Webb. Fees vary widely, and target date funds can invest in mutual funds that charge a fee on top of the TDF management fee.
Investors who know their own risk preferences might prefer to make their own investment allocation decisions, says Webb. But for those who are comfortable with a more low-maintenance approach to investing, TDFs can be a great alternative.
To find out if target date funds fit into your retirement savings plan, talk to a SunTrust Investment Services financial advisor.
The target date in the name of the fund is the approximate date when an investor plans to start withdrawing money and the principal value of the funds is not guaranteed at any time, including the target date.
Mutual Fund values fluctuate so that an investor’s shares, when redeemed may be worth more or less than their original cost.
Investors should consider the investment objectives, risks and charges and expenses of a mutual fund carefully before investing. A prospectus which contains this and other information can be obtained from your financial professional. Please read the prospectus carefully prior to investing.