What is a Target Date Fund Glide Path?

A Target Date Fund (TDF) is the “set it and forget it” fund option for many 401(k) plan participants and retirement investors. This type of fund automatically rebalances the overall asset allocation for a targeted mix of equity and fixed income investments based on the investor’s age and an assumed retirement date. Often TDFs are named as the default investment option within 401(k) plans since they are designed to be age appropriate and generally do not require the participant to make any allocation changes themselves over time. The year noted in the TDF name is the year the plan participant plans to retire; their targeted retirement date (ex. Target Date 2030 is referring to the year 2030, a participant looking to retire during that year would select this fund as his or her investment option). Most TDFs are named in five-year increments, so the participant would choose the fund closest to his or her planned retirement date. Most TDFs assume a retirement date of age 65, however a participant can select any TDF that is appropriate based on his or her goals and desired retirement date.

A TDF’s glide path is the changing mix of equity and fixed income investments over time. As the participant’s target retirement date gets closer, the fund’s overall asset allocation “glides down” to a less volatile mix of investments. For younger participants with a significant amount of time before reaching their targeted retirement date, the overall asset allocation will be much more aggressive and hold a greater percentage of equity funds than fixed income funds, with a primary goal of growth. Over time, those investments will shift to more fixed income investments so that the overall asset allocation becomes more conservative and more aligned with preserving capital and generating income.

Some TDF glide paths continue holding some equity funds past the targeted retirement date in order to provide growth opportunities to ensure the longevity of the portfolio value throughout the participant’s retirement time frame. A 65-year-old is still a long-term investor with a 30-year time horizon which needs to be planned for by the portfolio asset allocation. Below is a basic example of a TDF glide path:

Source: Capital Group / American Funds

It’s important to note that the managers of TDFs don’t just change the percentage of equity funds and fixed income funds over time but also tactfully manage the types of equities and fixed income funds over time as well to take advantage of current market opportunities and benefit the retirement investor. TDFs are an easy and efficient way of ensuring that participants have a proper asset allocation based on their age and time until retirement that they don’t have to manage themselves.

TDFs can help participants avoid being their own worst enemy by being too reactive to volatile markets. It’s important to remember that even with their growing popularity, TDFs aren’t perfect and are not always the optimal choice for every participant or retirement investor. All investments carry some risks and TDFs are no exception. However, for many participants, the one stop convenience often makes them the right choice.

If you have questions about a TDF that you’re invested in or you would like to learn more about them, please don’t hesitate to contact our office.

Source: https://www.plansponsor.com/in-depth/understanding-tdf-glide-paths/