If you sponsor or participate in an employer-sponsored retirement plan such as a 401(k) or 403(b), odds are good that your fund line-up includes target date funds (also referred to as “lifecycle funds.”)
These investment options are attractive for do-it-yourself investors and retirement plan participants. This is because periodic re-balancing of the investment portfolio is built into the fund, reducing the need for the end investor to have to manually re-balance a portfolio that is over weighted in equities or fixed income.
In many cases, target date funds are named for different years, with the year representing the year the investors plan to retire and begin taking distributions. The underlying investments in the funds, and the allocation to the different investments, will shift over time, as the time to retirement gets closer.
For example, a “2020” fund is likely to be invested much more conservatively than a “2050” fund. So, while the fund with the longer time horizon will have more potential for growth over time, it also is subject to more risk. Maybe say instead: Funds that seem the same initially, may actually be very different in terms of investments and risk profiles.
These types of investments are intended to be stand-alone investments, meaning that if your retirement plan lineup includes target date funds in addition to a menu of other investment choices, you would either choose your own portfolio of non-target date fund options, or you would choose the one target date fund that is closest to your investment time horizon.
With any investments, it is important to educate yourself about the fund’s fees, risks, management and other information that can be found in the fund’s prospectus.
To learn more about target date funds, see FINRA’s investor education pages or contact us.