Target Date Funds, By the Numbers

Target-date mutual funds (TDFs) have become increasingly popular, growing from $6 billion to $245 billion between 2000 to 2010 according to a study by the Wharton School. TDF’s are a unique type of retirement fund, commonly used by younger investors. TDF’s feature automatic re-balancing over the years leading up to retirement, decreasing portfolio risk over time with more conservative investments in bonds, treasury securities and cash equivalents. These funds aim to simplify employee investment decision-making and delegate important portfolio choices to investment managers selected by the employer.

In what is often referred to as the “equity glide path,” equity allocations are highest for young participants farthest from retirement (e.g. the 2050 fund) and lowest for those approaching and in retirement (e.g. a current-dated option such as the 2010 fund). Once a participant’s account is invested in a given target-date fund, his portfolio equity share is lowered over time due to age-related re-balancing by the fund manager (who also handles all other portfolio management decisions). Target-date funds have grown rapidly in the U.S. From 2000 to 2010, 70% of DC plans offered target-date funds and 36% of all DC plan participants held positions in these funds (as of 2010).

As investors in TDFs approach retirement, their asset allocation will be heavily weighted toward bonds and other fixed-income securities. Those investors who want a more aggressive investment allocation can select a later target date fund (for example, one for 2035 rather than 2030) to be part of that fund with increased risk and potentially higher returns.

 

 

Digging deeper into TDF performance, the Credio team analyzed all target date funds, and narrowed down the list to the top three TDFs for each retirement period (from 2016 through 2055) with the following criteria: