Target-date funds: Will they free you from the 9-to-5?

Funds that adjust over time are meant to help you ease into retirement.

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Gliding into your golden years

Target-date funds are usually mutual funds that automatically adjust their risk level, putting your money into less risky options as you get closer to retirement. This is supposed to help protect your money as you prepare to begin using it.

In an environment where both stocks and bonds fall as interest rates rise at a rapid pace and recession fears mount, target-date funds suffer because they include a mix of stocks and bonds.


A fund like this is a type of “fund of funds.” The asset managers who put these funds together typically use various ETFs or mutual funds to get someone who is on their way to retirement on a lower-risk investing path over time. The rate at which employers automatically enrolled their employees in TDFs increased after the US Congress passed the Pension Protection Act in 2006, which gave new legal protections to employers who chose TDFs as a default 401(k) investment.

So, are TDFs the smoothest path to retirement? Let’s invest a few moments in finding out.


By the digits

24%: Share of all 401(k) assets that are in target-date funds 

One third: Share of investors that didn’t use target-date funds appropriately in 2021, according to Vanguard—TDFs are meant to be one-stop shops and many investors pile other funds on top of them

5 to 30: Number of other funds of which target-date funds are usually comprised

62%: Share of employers who automatically enrolled their employees in a retirement plan in 2020, per a study by the Plan Sponsor Council of America


63%: Average share of retirement savings contributions going to target-date funds

14%: Decrease in the value of target-date funds in 2022, showing that no investment is 100% safe when equities and bonds fall in tandem


Explain it like I’m 5

How are TDFs supposed to get you to retirement?

A TDF is either designed to take you to or through retirement. The TDF will rebalance the investor’s portfolio to the most conservative setting either when they hit retirement or some years after.


Most Americans don’t see changes to their target-date funds. Usually employers decide into which TDFs they want to put their employees’ 401(k) assets. Whether employees get a more active or passive fund usually comes down to those whims.

When you’re very young, the returns on a TDF investment should be rocky. It’s the best time for your portfolio to be exposed to the wild upswings in the stock market (while sustaining the occasional downswing). When workers get closer to retirement is when it makes sense to start moving a portfolio away from equities and more into bonds, especially the inflation-protected ones.


BlackRock uses 10 different “building blocks” in a target-date fund portfolio to achieve a smooth landing in retirement. Three of these are types of equities: Large cap US stocks, small cap US stocks, and all international stocks (including emerging markets). Then it mixes in real estate, five fixed income products like bonds, and inflation-protected securities.


“We can’t define success as targeting a total return. We also can’t define success as reducing or eliminating risk… because you’d end up in some sort of short-term bond or money market or cash product. Investor outcomes would be harmed because they wouldn’t be keeping pace with inflation, and they wouldn’t be growing their wealth.”


—Brian Wimmer, head of multi-assets solutions at Vanguard, in an interview with Quartz

Pop quiz

Gif: Giphy

What do asset managers call the path towards retirement that target-date funds provide?

A. Retirement Runway

B. Glide Path

C. Get Out of Jail Free Card

D. Rocky Road Savings

Jet on down to the bottom of the email for the answer.

Brief history

1978: The 401(k) is established in the Revenue Act of 1978.

1994: Wells Fargo and Barclays Global Investors roll out the target-date fund to investors.


1995: Donald Luskin and Larry Tint of Wells Fargo Institutional Trust patent the target-date fund.

2006: Congress passes the Pension Protection Act which gives legal protections to employers who automatically enroll employees into 401(k)s that contain target-date funds.


2008: Target-date funds see large losses in the Great Financial Crisis. Long-dated TDFs are able to ride the economic recovery, but shorter-dated ones, like those that were set to retire in 2010, fared much worse.

2017: The assets under management in target-date funds passed $1 trillion, up from $158 billion in 2008.


2018: TDFs have another rough year because of a volatile stock market, but perform better than they did in 2008.

2020: TDFs proved much more resilient than in years past, despite the extreme volatility of the covid-caused recession.


The market-moving power of TDFs

Research from economists at MIT and Brandeis University revealed that TDFs not only affect individual stock performance, but now have enough investment power to change the tide of the stock market.


This is because TDFs often trade contrary to how most investors trade. When stock markets rally, TDFs often respond by selling stocks and buying bonds as they try to become more conservative over time. The widespread adoption of TDFs means that excess returns during stock market rallies are more muted across the entire market than they were before.

The mutual funds that hold a large amount of TDFs also experience less volatility than other mutual funds. When stocks are up, less money moves into them, but when stocks are down less money moves out of them.


Lastly, stocks that are owned by a lot of TDFs usually don’t rise as much as other stocks when the market rallies. This is because TDFs hold them back from the wild swing as they recalibrate.

Fun fact!

TDFs are getting cheaper! From 2008 to 2022, the expenses on target-date mutual funds have fallen by half to an average of 0.32%.


Take me down this 🐰 hole!

TDFs are facing a surge of federal lawsuits, alleging underperformance caused by plan sponsors not paying enough attention to the funds. Many of these lawsuits have been rebuffed by the defendants, but the growing litigation in this space may put employers on edge about how well they’re managing their employee’s retirement.


“The issue that’s unfair in these cases is the central question: When have you underperformed?” Daniel Aronowitz, managing principal and owner of Euclid Fiduciary Managers, told Bloomberg Law. “What is the amount of time that would be prudent to change these funds? We’ve always thought of these as long-term investments, so why are a few years of performance so critically important?”


Gif: Giphy

If your retirement savings gave you a superpower, which would you choose?

  • Time Travel (I want to retire right now)
  • Invisibility (I want enough money to buy an island and take a long solitary vacation)
  • Weather Control (I want enough money to decide when it rains and when it shines)
  • Telekinesis (I want my money to move mountains)

Take our one-question poll—it provides an exceptional ROI. 

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Today’s email was written by Nate DiCamillo (targeting an early retirement), edited by Annaliese Griffin (will be working until she is 80), and produced by Susan Howson (better receive island retirement postcards from Nate as she’s working alongside Annaliese).

The correct answer to the quiz is B. Glide Path.