When you look over the investment options in your retirement plan, you probably see a 2020 fund, a 2030 fund, a 2040 fund, and on up the line. Those are “target date funds.” They can be mutual funds, exchange traded funds, or pooled separate accounts. But what are they and what are they designed to do?*
A target date fund is an investment vehicle that invests in equites, bonds, and other funds. What’s different about a target date fund is its stated goal. It does not claim to simply maximize your investment return.
A target date fund’s goal is to gradually transition your retirement savings – from riskier investments when you are young to safer investments when you near retirement. A 2040 fund will be highly invested in stocks with very few of its assets devoted to safe investment vehicles like bonds. For example, this John Hancock mutual fund, the Retirement Living through 2040 Portfolio, has only 4.6% of its assets devoted to bonds and nearly 35.7% of its assets devoted to aggressive growth stocks.**