Target Date Funds: are they right for your 401(k) plan?

Target Date Funds (TDF) are investment funds that take a time horizon approach to shift a portfolio’s asset allocation to become more conservative over time as the participant moves closer to their retirement date. These types of funds are geared toward investors with retirement accounts such as an IRA or 401(k) and are typically set up to align with a participant’s planned year of retirement. For example – if you plan on retiring eight years from now, in 2025, you would select a 2025 target date fund.

Who should consider TDFs?

TDFs are popular because their diversified investment strategy is professionally managed for you via a “glide path” approach. The glide path determines the asset allocation of the target date series in relation to the target retirement dates. In general, time horizon is a key factor that drives investment risk and return decisions. Typically, younger investors should be aggressive to increase the potential to grow balances quickly, while those closer to retirement are conservative to protect their nest egg.

The number and utilization of target date funds are on the rise, however, they may not always be the best solution for participants. They are often touted as being an easy way for unsophisticated investors to create a well-diversified portfolio; choosing one is often more complex than you might think.  Some TDFs invest participant’s money up to the target date and others actively manage these “through” the target date.  Even within the TDFs with the same “to” or “through” philosophy, the glide paths can be materially different. For example, in 2009, the losses in 2010 target date funds ranged from roughly 9% to 41%.  1Both of these investments had names that implied they were associated with someone who expected to retire within a year!  While the idea of easy investing is appealing, the actual selection of the correct target date fund is not as simple as most believe.  When you look inside a target date fund, you might also be surprised to see that these often have a very high proportion of the sponsoring fund family’s proprietary investments. 

Target Risk Approach – an alternative to Target Date Funds

In large part target date funds singularly rely on a target retirement date, while other options focus on a target risk profile.  These funds have diversified investment strategies that are based on an individual’s risk tolerance. To be fair, there can be the same differences in the perceptions of what an “aggressive” portfolio should look like. There is much less doubt as to whether an “aggressive” risk approach will be more volatile than a “conservative” approach, even across providers.  There will always be outliers that make these types of decisions difficult, but participants understand risk better than they do glide paths. A target-risk fund may be best for you if you’re looking for an easy-to-understand fund that’s tailored more toward your risk preferences. 

Targeting anything is yesterday’s news

401(k) participants don’t need more target date or target risk investments.  The truth of the matter is that the average 401(k) participant has neither the desire nor the time to understand the nuances of their 401(k) investment options. They need someone to come alongside them and guide them.

PAi’s CoPilot program uses a target-risk approach to offer model portfolios to accommodate a broad range of participant risk preferences. Target date funds and target risk offerings don’t matter at all if a participant isn’t in the right one or saving enough. That’s why the CoPilot service provides Financial Service Representatives watching what participants are doing with their investments and reaching out to help them when their investment decisions appear atypical.  Move beyond yesterday’s investing arguments and offer personalized investment advice from real professionals. Contact us or call: 800-236-7400.


1 Target-Date Series Research Paper: 2010 Industry Survey.  Retrieved from

Ryne Lambert, MBA - Financial Services Representative Team Lead - - 800-236-7400 x3491

Ryne is a subject matter expert on 401(k), retirement savings, investments, participant advice, personal finance education and behavioral finance.