Crucial Questions to Ask Your Target-Date Fund Provider

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Crucial Questions to Ask Your Target-Date Fund Provider

Person using calculator
A target-date fund, or TDF, is an investment vehicle whose asset allocation becomes more conservative as the target date approaches. For most TDFs this means a slow rotation out of equities and into bonds and other fixed-income investments.

TDFs are extremely helpful for passive investors who simply want to put money away for their retirement and not worry about it. The TDF structure takes more risk in the beginning of the investment period, allowing investors to chase growth returns while they still have a long time left before retirement. By concentrating volatility in the beginning of the term structure, a TDF ensures that the investor will have cash flow instead of capital growth when retirement is near.

But before diving into a target-date fund, it’s important do some due diligence and ask your provider these key questions.

1. At What Age Should I Expect to Retire?

Age is the number one driver of an investment in a TDF. Investment research and common logic agree that the older you get, the less risky your investments should become. The foundation for this logic is based on the idea that an investor will eventually want to cash out their investment to spend during retirement.

So when approaching a TDF investment, you need to honestly ask yourself, “At what age do I expect to retire?” Then you need to assess if your estimate is accurate by using an investment tool or advisor. Once you confirm that your age target is realistic, then you can select a TDF that aligns with your retirement goals.

2. Global Investments or U.S. Investments?

What type of asset allocation do you believe will capture the most return over the next 20 to 50 years? The U.S. has had fantastic asset performance over the last 60 years, outpacing the rest of the world, but this might not always be the case.

Global investments allow for regional diversification that U.S. investments do not offer. Diversification is the only “free lunch” known in the investment world as it allows investors to mix different asset classes to create a stable risk-to-return ratio. However, U.S. investments are coupled with the economic situation in the U.S. Thus if the U.S. is underperforming the rest of the world, it is likely these investments will underperform as well.

3. How Much Risk Can I tolerate During Each Phase of the Strategy?

What types of assets does the TDF invest in during the “risky” part of its strategy and what types of assets does the TDF invest in during the “cash flow” part of the strategy? This question is very important for potential investors in a TDF because it will allow you to see the benefits and risks associated between potential TDF investments.

One TDF might invest in only U.S. small caps during the risky phase, and then rotate into U.S. T-bills, while another might invest in S&P 500 stocks and rotate into corporate bonds. These strategies will create different risk-to-reward profiles that each investor must judge for themselves.

The Bottom Line

When considering target-date funds, it is important to first ask yourself the hard questions:
  • When do I want to retire?
  • Do I want global diversification?
  • How much risk am I willing to accept in the short term? In the long term?

By answering these questions honestly and with the help of a financial expert, you might find that the right TDF becomes the perfect tool for planning a stable retirement future.

Image courtesy of Goldy at FreeDigitalPhotos.net

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Person using calculator

Crucial Questions to Ask Your Target-Date Fund Provider

A target-date fund, or TDF, is an investment vehicle whose asset allocation becomes more conservative as the target date approaches. For most TDFs this means a slow rotation out of equities and into bonds and other fixed-income investments.

TDFs are extremely helpful for passive investors who simply want to put money away for their retirement and not worry about it. The TDF structure takes more risk in the beginning of the investment period, allowing investors to chase growth returns while they still have a long time left before retirement. By concentrating volatility in the beginning of the term structure, a TDF ensures that the investor will have cash flow instead of capital growth when retirement is near.

But before diving into a target-date fund, it’s important do some due diligence and ask your provider these key questions.

1. At What Age Should I Expect to Retire?

Age is the number one driver of an investment in a TDF. Investment research and common logic agree that the older you get, the less risky your investments should become. The foundation for this logic is based on the idea that an investor will eventually want to cash out their investment to spend during retirement.

So when approaching a TDF investment, you need to honestly ask yourself, “At what age do I expect to retire?” Then you need to assess if your estimate is accurate by using an investment tool or advisor. Once you confirm that your age target is realistic, then you can select a TDF that aligns with your retirement goals.

2. Global Investments or U.S. Investments?

What type of asset allocation do you believe will capture the most return over the next 20 to 50 years? The U.S. has had fantastic asset performance over the last 60 years, outpacing the rest of the world, but this might not always be the case.

Global investments allow for regional diversification that U.S. investments do not offer. Diversification is the only “free lunch” known in the investment world as it allows investors to mix different asset classes to create a stable risk-to-return ratio. However, U.S. investments are coupled with the economic situation in the U.S. Thus if the U.S. is underperforming the rest of the world, it is likely these investments will underperform as well.

3. How Much Risk Can I tolerate During Each Phase of the Strategy?

What types of assets does the TDF invest in during the “risky” part of its strategy and what types of assets does the TDF invest in during the “cash flow” part of the strategy? This question is very important for potential investors in a TDF because it will allow you to see the benefits and risks associated between potential TDF investments.

One TDF might invest in only U.S. small caps during the risky phase, and then rotate into U.S. T-bills, while another might invest in S&P 500 stocks and rotate into corporate bonds. These strategies will create different risk-to-reward profiles that each investor must judge for themselves.

The Bottom Line

When considering target-date funds, it is important to first ask yourself the hard questions:
  • When do I want to retire?
  • Do I want global diversification?
  • How much risk am I willing to accept in the short term? In the long term?

By answering these questions honestly and with the help of a financial expert, you might find that the right TDF becomes the perfect tool for planning a stable retirement future.

Image courtesy of Goldy at FreeDigitalPhotos.net

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next