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There are many investment options for a 401k retirement plan, with target date funds being one of them. This investment fund has been available in plans for decades.

Target date funds are so popular right now that you are probably invested in one without realizing it. It is the most basic type of 401k retirement plan for those workers who don’t have the time to manage investments. Due to its simplicity, target date funds are becoming a staple in any 401k retirement plan.

What Is A Target Date Fund?

A target date fund is a uniquely designed investment fund that is commonplace in a 401k retirement plan. It provides a balanced approach that meets the needs of investors saving specifically for retirement. The objective of a target date fund is to grow and then maintain assets with a specific target date — retirement — in mind. It is a long-term investment that includes a predetermined time horizon.

As with any retirement fund, the asset allocation — the mix of stocks (equities) and bonds in the portfolio — depends largely on the age of the person. A younger investor saving for retirement will usually have a very aggressive portfolio that is mostly stocks. Although this can be risky at times, that young investor has time to recover from losses and could benefit from massive stock exposure. Meanwhile, an older investor on the verge of retirement will likely require a more conservative asset allocation with a even mix of stocks and bonds.

Asset Classes Of Target Date Funds

The unique aspect of a target date fund is the glide path. This feature lowers some risk by automatically shifting the aggressive asset mix of stocks and bonds to a more conservative mix as you get closer to your target retirement age. Most target date funds will include a year in the title. This means a target date fund listed with 2025 is for those people who are retiring in a few years. A target date fund with 2060 in the title is for people who are 40 years removed from retirement.

Typically, a retirement fund that is 40 years before retirement has an aggressive asset allocation of 90 percent stocks and 10 percent bonds. 20 years later, the asset allocation would shift closer to 85 percent stocks and 15 percent bonds. About 10 years before retirement, the mix might be 70 percent stocks and 30 percent bonds. By the actual target date, the fund might be an even 50 percent stocks and 50 percent bonds. In some target date funds, the equity continues to decrease in retirement, all the way down to 30 percent stocks and 70 percent bonds.

How Popular Are Target Date Funds In A 401k Retirement Plan?

Due to its convenient nature, a target date fund is a common aspect of a 401k retirement plan. It is typically the default investment that new employers get when they enroll in their company’s retirement plan. Vanguard is one of the most popular providers of target date funds. A 2018 study from Vanguard found that one-third of assets in retirement plans are target date funds, and half of participants with Vanguard are invested in a single target date fund.

The Benefits Of A Target Date Fund Investment

Although a target date fund is not an option for every investor saving for retirement, there are many benefits. Target date funds are the ultimate “set it and forget it” investment that requires no skill or knowledge of assets. Investors just contribute their money to a target date fund and then the plan allocates the assets accordingly. The plans also automatically rebalances, which is helpful.

More importantly, target date funds are generally one of the most low-cost investment options within a 401k retirement plan. Years ago, investment companies created target date funds as a low-cost alternative to managed investing.