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What is a Target Date Fund? Retirement Terms to Know

A target date fund is a type of investment fund that automatically adjusts the asset allocation mix according to the age you plan to retire typically.

What is a Target Date Fund | Two women talking

Published on

Jan 26, 2024

Written by

Penelope Team

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Starting a retirement plan can feel complicated for some business owners, especially when it comes to choosing the right funds and understanding the different fees. That's where Penelope comes in to help. At Penelope, we’re making saving for retirement affordable and simple for businesses of all sizes. Our retirement plans utilize target date funds, so all you have to do is think about when you’d like to retire. In this guide, we’re going to take a closer look at target date funds so you can better understand how they work. 

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What is a Target Date Fund?

A target date fund is a type of investment fund that automatically adjusts the asset allocation mix according to a selected time frame, usually the age you plan to retire. These funds are designed to be a "set it and forget it" type of investment where the fund managers rebalance the assets over time, moving from more aggressive investments early on to more conservative ones as the target date approaches.

Target Date Fund Example:

Let's say you decide to invest in a retirement plan that uses a target date to determine the fund assets and you are a 35-year-old planning to retire at age 67.

Initially, the fund will likely be heavily weighted towards riskier assets like stocks, because you have a long investment horizon—32 years until you retire—-and can afford to take more risk for potentially higher returns. As you get closer to your retirement year, the fund automatically shifts its allocation to favor less risky assets like bonds and cash equivalents. This shift aims to preserve the wealth you've accumulated over the years.

It's important to note that while target date funds simplify asset allocation and offer a hands-off approach to retirement investing, they don't guarantee a certain return or protect against losses. Investment involves risk, and it's important to carefully consider your personal risk tolerance and retirement goals before investing.

Remember, always consult with a financial advisor and do thorough research when making decisions about retirement planning.

Why Choose a Target Date Fund Plan?

Target date funds help take the guesswork and heavy lifting out of investing to provide a simple path to retirement savings. The built-in reallocation takes the guesswork out of managing individual investments, which is a plus for small business owners and their employees who may not have the time or expertise to actively manage a retirement portfolio.

Target date funds also provide diversification—spreading investments across various asset classes to mitigate risk—which is often challenging for individuals to achieve on their own. For many small business owners and employees, utilizing a retirement account that uses target date funds offers a straightforward path to retirement planning.

Risks and Benefits of Target Date Funds

While target date funds are hands-off and designed for convenience, it's essential to understand that none of these funds can guarantee a particular outcome. The value of the fund may fluctuate due to market conditions and investments decline.

On the upside, the benefits of such funds include professional management, adaptability to your changing risk tolerance as you age, and potential growth through a diverse mix of investments. On the downside, fees can vary by provider, and the one-size-fits-all nature of the target date fund might not suit everyone's unique retirement goals or risk profiles.

Common Target Date Fund Considerations

Picking the right target date fund involves a little more than just knowing your planned retirement year. Other considerations should include:

  • The glide path: This is how the fund transitions from aggressive to conservative investments as you age. Ensure the glide path aligns with your personal risk tolerance.
  • Underlying investments: Take a closer look at the fund's portfolio to understand the specific assets and securities you would be investing in. By examining the underlying investments, you can evaluate their performance, risk factors, and potential for growth, enabling you to make informed investment decisions that align with your financial goals and risk tolerance.
  • Your overall investment portfolio: Consider how a target date fund fits into your overall investment strategy. It's essential to have a diversified portfolio, even within a single type of investment, and a target date fund should be just one piece of your retirement savings puzzle
  • Fees and expenses: Different providers may have varying fees associated with their target date funds. Make sure to compare the costs across different funds to find the most cost-effective option for you. Higher fees can eat into your retirement savings over time, so favor target date funds with lower expense ratios

When selecting a retirement provider, consider your retirement strategy, the fund’s performance history, fee structure, and the credibility of the fund provider.

Get Started With a Penelope Retirement Plan

Choosing the appropriate retirement plan for your small business doesn't have to be hard with Penelope. Our plans feature target date funds and offer a simplified approach to helping you achieve your long-term financial goals.

Contact us at Penelope to get a retirement plan recommendation to align with your business's specific needs. Your journey to a secure financial future starts with a solid plan, and we’re here to help you get started.

Learn About Our Retirement Options:

We offer a Starter 401(k) plan, which is a great option for small business owners who are looking for an alternative to state-sponsored retirement plans. This plan is easy to set up, starting at $49 per month plus $3 per month per active employee. This plan does not allow for employer contributions and employee contributions are fully vested.

The second plan type we offer is a Safe Harbor 401(k) plan. This plan is best for small businesses looking to help their employees grow their retirement wealth through employer contributions. This plan starts at $125 per month plus $8 per month per active employee. Getting started with either plan option only takes 15 minutes. After telling our team about your business and selecting your eligibility requirements, you'll be on your way to connecting your payroll provider and offering your employees a benefit that they want. Get started today.

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