Target date funds have earned their popularity. Employees pick a retirement year, or are placed in one automatically, and the fund handles the rest: a diversified mix of investments that gradually becomes more conservative as that year gets closer. For people who don’t want to manage their own investments, that’s a real benefit. For plan sponsors, it’s a straightforward way to offer a sensible default.
The catch is that the simplicity sits on top of a decision that isn’t actually all that simple. Employees choose the year, but the employer chooses the fund family, and two funds with the same year can follow very different paths. A fund designed around a typical investor may not match the people who actually work for you, which is why the selection deserves more than a one-time decision.
The year in the name doesn’t tell the whole story
A target date fund shifts gradually from stocks toward bonds as the target year approaches. That shift is called the glide path, and it’s where funds differ most. Two funds with the same year can follow very different paths.
Here’s a hypothetical illustration:
| Fund A: 2035 | Fund B: 2035 | |
|---|---|---|
| Stocks at the target date | 35% | 50% |
| After the target date | Holds steady | Keeps shifting toward bonds |
Target date funds are not guaranteed. Their value can rise or fall, including near and after the target date, and diversification does not ensure a profit or protect against loss. The comparison above is a hypothetical illustration of two glide paths, not a description of any actual fund. This article is for general educational purposes and is not individualized investment, legal, or ERISA advice.
Neither is automatically right or wrong. The point is that they behave differently, and the label gives no hint of that.
This is the “to retirement” versus “through retirement” distinction. A “to” fund reaches its most conservative point at the target date. A “through” fund keeps adjusting afterward. Which one fits depends on what your employees tend to do at retirement: cash out right away, or stay in the plan for years.
Four questions worth asking about your target date funds
- Does the glide path go “to” or “through” retirement, and does that fit how your employees actually leave?
- What does it cost? That means the fund’s own expenses and the funds inside it.
- Was it chosen, or inherited? Many plans use the series their recordkeeper offers. That can be a fine choice, but it should be a decision rather than a default.
- Is the process written down? Your investment policy statement should say how target date funds are selected, how they’re monitored, and when they’re reviewed.
More than one way to do it
The off-the-shelf series from your recordkeeper isn’t the only option. Depending on what your provider supports, you might consider:
| Option | What it is | Worth knowing |
|---|---|---|
| Recordkeeper's series | The target date funds your provider already offers | Simple to run, but worth confirming it was compared with alternatives |
| Independent series | A series chosen from the wider market | Gives you more choice, with more to evaluate |
| Custom target date funds | Built from the investments already in your plan | Can fit your workforce more closely, and needs your provider's support and ongoing oversight |
The Department of Labor’s guidance specifically encourages sponsors to ask whether a custom or non-proprietary option would suit their plan better. It doesn’t say any one approach is best.
This isn’t about predicting markets
A review of your target date funds isn’t a forecast. Nobody can tell you whether a fund will outperform next year. What you can do is check that the fund fits the people it was chosen for, that you understand what’s inside it, and that you can show how and when the decision was made.
What a review looks like
A practical review has four steps:
- Gather the fund fact sheets, the glide path details, the full cost picture, and a snapshot of your workforce (ages, salaries, turnover, and how people take their money at retirement).
- Compare your current funds with a few alternatives against the questions above.
- Decide, whether that means keeping what you have or changing it.
- Document what you reviewed, what you concluded, and when you’ll look again.
All four steps leave you better off. If your funds hold up, you have a record that says so. If something’s out of line, you know before a participant asks. Target date funds should be reviewed consistently for performance, with a fuller analysis at an interval that is set and documented.
The funds your employees rely on without thinking about them are the ones that deserve the most thought from the people who chose them.
