Target date funds (TDFs) are an integral part of many deferred compensation programs around the country. They offer many advantages, particularly for participants who are not inclined to actively engage in an investment strategy. One of the greatest advantages is that TDFs are designed to automatically rebalance as the participant gets closer to retirement. Many plan sponsors choose TDFs as the default investment option for their participants. TDFs offer a long-term investment strategy using a mix of investments that change as the participant ages. The asset allocation strategy moves from a more aggressive, riskier approach in a participant’s younger years, to a more conservative, less risky approach nearing retirement. It is important for plan sponsors to know whether their TDFs use a “to retirement” or “through retirement” approach: the “to” approach will reduce equity exposure so that the TDF reaches its most conservative point at the target date; the “through” approach will use a strategy that reaches the most conservative asset allocation much later.
Because TDFs can vary widely in asset allocation strategies and fees, offering TDFs comes with some fiduciary responsibilities. To meet these responsibilities, plan sponsors should:
With appropriate oversight, TDFs may offer many enhancements to your plan. In addition, offering a TDF as your default fund may help you increase plan participation. A qualified retirement plan advisor can help you navigate and manage your responsibilities for these and other funds in your plan.
The target date is the approximate date when investors plan on withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the funds is not guaranteed at any time including at and after the target date.
Last reviewed 6/1/2022
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