Are Target Date Funds Right for Me?

Target date funds (also called lifecycle funds) are mutual funds that link an investment portfolio to a particular time horizon. In fact, most target date funds have a date attached to their name. This date should be correlated with a particular event in the investor’s life, most usually their expected retirement date. These funds are becoming more and more common in company 401(k) plans.Target Date Mutual Funds

Target date funds are unique in that they are actually fund of funds, meaning the target date fund invests in a collection of mutual funds. This is done for diversification purposes. For instance, a target date fund will usually be made up of mutual funds that specialize in large, mid, and small cap stocks, international stocks, and even corporate and government bond funds. As a fund of funds, a target date’s expense ratio is heavily impacted by the expense ratios of the underlying funds.

Target date funds are designed to automatically scale back the level of investment risk in a portfolio as the investor ages. Young investors, not intending to retire until 2040, probably prefer to be aggressive while retirement is not on the horizon, but become more and more conservative as retirement approaches. Target date funds accomplish this goal automatically. As the date gets closer to the target date, the fund will usually begin selling stocks and purchasing bonds and money market instruments, making the portfolio continually more conservative.

It should be noted that a fund does not cease to exist when the target date is reached. The fund of funds will continue to operate as usual after reaching the target date. That date simply measures how aggressive or conservative the fund should be at any point in time.

Before investing in a target date fund, be aware of the implications of using a “one-size fits all” approach to investing. The target date fund may not scale back the aggressiveness of a portfolio as quickly as some investors would like, while being too conservative for others. This is a serious issue not present when an individual utilizes a portfolio of individual stocks, bonds, or mutual funds where they have more control over the portfolio’s overall level of risk.

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About the author

Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as and (by The Wall Street Journal). Additionally, Lon is an expert author at Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or Learn more about Net Worth Advisory Group at and visit Lon's blog at


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  • Thanks soo much Lon! Exactly the answer I was looking for. You are a great writer and your information is to-the point, no fluff, just what I wanted. Will pass this on…..I’m so glad I discovered FiGuide, you are a great asset.

  • Beth,

    The most important factor to consider when evaluating potential target-date funds is the percentage of assets that the fund manager allocates to stocks, bonds, and cash. If you examine five different 2040 target funds, you’ll likely find that each fund allocates a substantially unique ratio of assets to the major investment categories. Additionally, pay attention to the expense ratio of the fund. Expenses can be as low as .2% (Vanguard) and as high as 2%.

    Generally, I think target-date funds from Vanguard, T. Rowe Price, and Fidelity are a good place to start your search.

    Lastly, using target-date funds as a way to enter the investment arena makes sense. A target-date fund will diversify dollars automatically, whereas an investor would have to invest in 5-12 individual funds to achieve proper diversification. If a young investor can’t afford to meet the minimum investment level of these 5-12 funds, target-date funds are a great solution.

    Thanks for your comment and question.

  • Lon:
    Is there a particular mutual fund co. that you would recommend for these? Of course Vanguard is always known, but I think my children (18-30) would be wise to start with this as their first choice of investing.
    Thanks in advance.

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