Target-Date Funds: What to Review in Your 401(k)

A target-date fund is a diversified investment option designed around an approximate retirement year. It typically holds a mix of stock and bond funds and gradually changes that mix over time according to a predetermined glide path.

The convenience can be useful for investors who prefer a single investment option, especially in a workplace retirement plan. However, the retirement year in a fund's name is not a personalized recommendation. Different families with the same anticipated retirement date can have very different income needs, savings, tax situations, and comfort with volatility.

A target-date fund is a fund of funds, meaning its portfolio is built from underlying investments. Reviewing those holdings can show how much exposure you have to domestic stocks, international stocks, bonds, and other categories, as well as whether large companies or particular sectors have an outsized role.

A fund may be diversified by the number of securities it owns while still having meaningful exposure to shared economic themes. Understanding the underlying holdings can help investors avoid surprises and decide whether the fund complements or duplicates other investments they already own.

Expense ratios are the annual costs charged by a fund, expressed as a percentage of assets. It is important to review both the target-date fund's expense ratio and the structure of its underlying holdings so you understand the total cost of the investment option.

A lower fee is not the only consideration, and a higher fee does not by itself make a fund unsuitable. Investors may compare fees alongside the fund's allocation, glide path, underlying investments, services, and fit with their own plan. Fund documents provide the relevant information.

A glide path is the schedule a target-date fund uses to shift its allocation as the target year approaches and, in some cases, after retirement. Many funds gradually reduce their stock exposure and increase their bond exposure, but the pace and destination of that change vary by fund family.

More conservative allocations may reduce some volatility, but they can also affect long-term growth potential. More aggressive allocations may offer greater growth potential but also greater downside risk. The appropriate balance depends on the investor's full circumstances, not the calendar year alone.

Bond funds inside a target-date fund can vary in maturity and duration. Duration is a measure of a bond fund's sensitivity to changes in interest rates, with longer-duration bonds generally experiencing larger price movements when rates change.

Fixed income can serve important roles in a portfolio, including income and diversification, but it is not risk-free. Investors should understand the interest-rate, credit, and liquidity risks associated with their bond holdings rather than assuming all bond funds behave like cash.

Start with the plan's investment menu and the fund's prospectus. Review the target date, allocation, glide path, expense ratio, and underlying holdings. Then consider how the option fits with your other accounts, expected retirement timing, tax situation, and ability to handle market volatility.

A target-date fund may be appropriate for some investors, while others may prefer a different allocation available in their plan. Before changing a workplace account, consider speaking with a qualified professional who can assess the trade-offs in the context of your entire financial plan. Our retirement planning process explains how Ankerstar Wealth approaches those conversations.