If you have a 401(k), you may be invested in a target-date fund (TDF) or have one as an investment option.
TDFs are professionally managed funds that invest in a variety of assets such as stocks and bonds, so they offer instant diversification. These funds may be appealing to “set it and forget it” investors who'd rather hand off investment decisions to the professionals. It’s like putting your retirement savings on autopilot. But TDFs do have their downsides, so it’s important to understand these investments before devoting yourself to one.
What Is a TDF, and How Does It Work?
TDFs are designed to shift their asset allocations or mix of the assets they invest in to become more conservative as you get closer to retirement. This is why TDFs are named after years or their target date. For example, the Fidelity Freedom Index 2045 is designed for people who expect to retire in or around 2045. As you approach that year, the TDF would shift its asset allocation. So if you started investing in a stock-heavy TDF today, its asset allocation may be more concentrated in generally less risky fixed-income investments such as bonds when you reach the target date.
