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Target date fund
A target date fund (TDF), also known as a lifecycle fund, dynamic-risk fund, or age-based fund, is a collective investment scheme, often a mutual fund or a collective trust fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches.
Target-date funds were invented by Donald Luskin and Larry Tint of Wells Fargo Investment Advisors (later Barclays Global Investors, BGI), and first introduced in the early 1990s by BGI. Their popularity in the US increased significantly in recent years due in part to the auto-enrollment legislation Pension Protection Act of 2006 that created the need for safe-harbor type Qualifying Default Investment Alternatives, such as target-date funds, for 401(k) savings plans. With the UK enacting auto-enrollment legislation in 2012, target-date funds are used by the National Employment Savings Trust (NEST), and are expected to become increasingly popular as their design should satisfy the Department for Work and Pensions's eligible default fund criteria.
A similar approach, called age-based asset allocation, was proposed by Mark Kantrowitz in the mid-1990s and was rapidly adopted by all "529" college savings plans.
A target-date fund is designed to be the only investment you need for retirement. You pick a fund with a year close to when you plan to stop working, and the fund manager handles the rest - gradually shifting from growth-oriented stocks to income-oriented bonds as that year approaches. For people who prefer not to manage their own portfolio, these funds offer a complete age-appropriate investment strategy in a single holding. They do not offer a guaranteed return but offer a convenient multi-asset retirement savings strategy through a single outcome-oriented fund.
Target-date funds' asset allocation mix typically provides exposure to return-seeking assets, such as equities, in early years when risk capacity is higher, and becomes increasingly conservative as time progresses with exposure switched progressively towards capital-preservation assets, such as government- and index-linked bonds.
The speed with which a target date fund de-risks its asset allocation is known in the industry as the "glide-path", using the analogy of an airplane (the fund, presumably) coming in for a landing (the landing being, presumably, arriving at the Target Date with the appropriately low-risk mix of underlying assets).
By taking a managed, or stochastic, approach to de-risking the fund, target-date funds offer a higher level of both technical and fiduciary care than earlier lifestyling techniques that rely on an automated, or deterministic, approach.
The theoretical underpinnings to glidepath design are based on combining modern portfolio theory, with the theory of "Human Capital", the present value of expected future earnings.
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Target date fund
A target date fund (TDF), also known as a lifecycle fund, dynamic-risk fund, or age-based fund, is a collective investment scheme, often a mutual fund or a collective trust fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches.
Target-date funds were invented by Donald Luskin and Larry Tint of Wells Fargo Investment Advisors (later Barclays Global Investors, BGI), and first introduced in the early 1990s by BGI. Their popularity in the US increased significantly in recent years due in part to the auto-enrollment legislation Pension Protection Act of 2006 that created the need for safe-harbor type Qualifying Default Investment Alternatives, such as target-date funds, for 401(k) savings plans. With the UK enacting auto-enrollment legislation in 2012, target-date funds are used by the National Employment Savings Trust (NEST), and are expected to become increasingly popular as their design should satisfy the Department for Work and Pensions's eligible default fund criteria.
A similar approach, called age-based asset allocation, was proposed by Mark Kantrowitz in the mid-1990s and was rapidly adopted by all "529" college savings plans.
A target-date fund is designed to be the only investment you need for retirement. You pick a fund with a year close to when you plan to stop working, and the fund manager handles the rest - gradually shifting from growth-oriented stocks to income-oriented bonds as that year approaches. For people who prefer not to manage their own portfolio, these funds offer a complete age-appropriate investment strategy in a single holding. They do not offer a guaranteed return but offer a convenient multi-asset retirement savings strategy through a single outcome-oriented fund.
Target-date funds' asset allocation mix typically provides exposure to return-seeking assets, such as equities, in early years when risk capacity is higher, and becomes increasingly conservative as time progresses with exposure switched progressively towards capital-preservation assets, such as government- and index-linked bonds.
The speed with which a target date fund de-risks its asset allocation is known in the industry as the "glide-path", using the analogy of an airplane (the fund, presumably) coming in for a landing (the landing being, presumably, arriving at the Target Date with the appropriately low-risk mix of underlying assets).
By taking a managed, or stochastic, approach to de-risking the fund, target-date funds offer a higher level of both technical and fiduciary care than earlier lifestyling techniques that rely on an automated, or deterministic, approach.
The theoretical underpinnings to glidepath design are based on combining modern portfolio theory, with the theory of "Human Capital", the present value of expected future earnings.