Target date mutual funds are mutual funds built around an expected year when the investor will start withdrawing money, usually retirement, and they gradually shift from stocks toward bonds and cash as that year approaches. The year in the fund’s name, such as 2050, signals which investors it is designed for.
Wealthlyn’s asset allocation coverage explains glide path design in general, and the ETF series covers target date ETFs. This article focuses on the mutual fund version: how it is structured, priced, and taxed, how it appears in workplace plans, and what to check before letting one fund carry an entire retirement plan.
A Retirement Plan Packed Into One Fund
The appeal of a target date fund is that it tries to answer the allocation question for you. Instead of choosing a mix of stock and bond funds and adjusting it over decades, you pick the fund closest to your expected retirement year and let it adjust automatically.
Early on, when retirement is far away, the fund typically holds mostly stocks for growth potential. As the target year nears, it gradually adds bonds and cash to reduce the size of potential losses close to the time the money is needed.
This gradual shift is called the glide path. Each fund family designs its own, so two funds with the same year in their names can hold quite different mixes at the same moment.
The convenience is real, but it rests on assumptions. The fund assumes you will retire near the target year and that its glide path suits someone in that situation. If your circumstances differ, the fund will not know, and it will not adjust for you.
To Versus Through Glide Paths
One of the most important differences among target date funds is what happens at and after the target year. Fund families generally follow one of two approaches.
- To glide path: the fund reaches its most conservative mix at the target year and then stays roughly constant.
- Through glide path: the fund keeps reducing stock exposure for years after the target date, reaching its final mix later in retirement.
- Practical effect: a through fund usually holds more stocks at the target year than a to fund does.
- Where to find it: the prospectus describes the glide path, often with a chart showing the planned mix by year.
Neither approach is automatically better. A through glide path assumes the money must keep growing during a long retirement. A to glide path places more weight on reducing losses right at the transition.
Knowing which approach your fund uses helps you understand how much it could fall in a downturn near your retirement date.
How a Target Date Mutual Fund Is Built
Most target date mutual funds are funds of funds. Rather than holding individual stocks and bonds, the target date fund owns shares of other mutual funds, each covering one area such as US stocks, international stocks, or bonds.
The underlying funds are often index funds, actively managed funds, or a combination, usually from the same fund family. The prospectus lists them and shows how much the target date fund holds in each.
As a mutual fund, it prices once per day.
An order to buy or sell receives the next net asset value (NAV) calculated after the order is received, which reflects the closing values of all underlying funds. Unlike a target date ETF, it does not trade during the day at changing market prices.
The fund-of-funds structure means expenses can come in two layers: the target date fund’s own fees and the fees of the underlying funds. The prospectus fee table combines these, with the underlying portion shown as acquired fund fees and expenses.
Share Classes and Workplace Versions
The same target date strategy can reach investors in several forms, and the form affects what you pay and how you hold it.
Retail and Retirement Share Classes
Mutual fund companies often offer target date funds in multiple share classes. Some are sold to individuals through brokers and may carry sales loads.
Others are designed for employer retirement plans and may have different expense levels or include fees that pay for plan record-keeping. The fee table lists each class separately, so check the one you actually own.
Collective Investment Trusts
In some employer plans, the target date option is not a mutual fund at all but a collective investment trust, a pooled vehicle generally available only within certain retirement plans.
These can follow similar glide paths but are regulated differently and do not have a mutual fund prospectus. Plan documents explain which type you hold.
Default Investments in Retirement Plans
Department of Labor rules allow employer plans to use certain diversified options, often target date funds, as the default for employees who do not choose an investment.
Being the default does not mean the fund was selected for your specific needs; it is designed as a general starting point for broad groups of employees.
Fees and Taxes Specific to the Fund Form
Total expenses vary widely among target date mutual funds, depending largely on whether the underlying funds are index funds or actively managed. Consider a hypothetical $50,000 balance: a total expense of 0.2% costs about $100 per year, while 0.8% costs about $400. Over decades, that gap compounds.
Taxes differ depending on the account. Inside a 401(k) or IRA, distributions are generally not taxed when paid. In a taxable brokerage account, they generally are, which creates some issues specific to mutual funds.
A target date mutual fund rebalances regularly as it follows its glide path and can realize capital gains, especially when shareholders redeem large amounts. These gains must be distributed and are reported on Form 1099-DIV, even to shareholders who did not sell.
Because of this, many investors keep target date mutual funds mainly in tax-advantaged accounts. Bond interest within the fund is also generally taxed as ordinary income in a taxable account. A qualified tax professional can explain how this applies to you.
Risks the Year Label Does Not Show
The year in a fund’s name tells you its target date, not its risk level. Funds with the same date from different families can hold very different amounts in stocks, which means very different potential losses.
A target date fund can lose money, including near or after its target date. Prospectuses for these funds typically state that they do not guarantee income in retirement or protect against losses, and that the investment value may be lower at the target date than the amount invested.
Concentration in one fund family is another consideration. Because most target date funds hold their own family’s underlying funds, a single company’s investment approach shapes your entire portfolio.
There is also the risk of pairing a target date fund with other holdings without realizing the effect. Adding a separate stock fund on top of a target date fund can raise your overall stock exposure well beyond what the glide path intends, defeating part of the fund’s purpose.
How to Check a Target Date Fund Before Relying on It
A short review can reveal whether a target date fund matches your situation. The documents you need are the summary prospectus, the glide path chart, and the most recent shareholder report.
- Find the current stock, bond, and cash mix and compare it with what you expected for your age.
- Check whether the glide path is a to or through design and what the mix looks like at the target date.
- Read the total expense ratio for your specific share class, including acquired fund fees.
- Review the list of underlying funds to see whether they are index-based, active, or mixed.
- Compare the fund’s long-term returns with its stated benchmark, which is often a blended index.
If the current mix feels too aggressive or too cautious for you, a fund with a different target year may fit better, even if it does not match your exact retirement year.
Repeat this check every year or so, because fund families sometimes revise their glide paths.
Using One Fund or Mixing It With Others
Target date funds are designed to be used alone. Their glide path assumes the fund represents your whole retirement portfolio, or at least the whole of that account. Holding one and nothing else in an account is the simplest way to get what the designers intended.
Some investors split money among two or more target date funds, or add other funds alongside one. This can create a mix that is hard to understand and may drift away from any planned allocation.
There are reasonable exceptions. If you hold assets in several accounts, a target date fund in one account and other investments elsewhere can work, as long as you track the total mix across all accounts.
If your spouse or partner also has retirement savings, consider your combined allocation. Two target date funds with different years may together produce a mix neither glide path intended, which is not necessarily a problem but is worth knowing.
Keeping Your Target Date Fund Aligned
Revisit your target date choice when your plans change. If you expect to retire earlier or later than planned, or if you expect other income such as a pension, the right fund year may shift.
Watch for changes in the fund itself. Fund families sometimes merge share classes, change underlying funds, or adjust the glide path. These changes appear in prospectus supplements and shareholder reports.
As you approach retirement, look closely at how the fund will be positioned at your target date and how it plans to change afterward. That is often the point where individual needs and a one-size glide path diverge most.
Consider talking with a qualified, fiduciary financial professional as retirement nears. They can help judge whether a target date fund still fits or whether a more customized approach to withdrawals and asset allocation would better serve your goals.