Target Date Fund (TDF)

Target Date Funds, structured as mutual funds, are commonly included as an investment choice in occupational pension plans. They may also be referred to as “lifecycle funds”. Although they are most often used to meet retirement planning objectives their usage is not restricted to qualified plans and anyone may invest in a target date fund via their bank or broker. Over time, as the fund approaches its “target date” the fund will be reallocated to reduce risk in aim of crystalizing as much value as possible in time for the commencement of the decumulation or spending phase.

Target date funds will feature their target date in their name to communicate their objective, e.g “Prudent Wealth Target Date Fund 2060”.
Fund managers will start with an asset mix that is heavily overweight in equities and underweight in fixed interest securities and cash. Over time the equity allocation will be reduced, and fixed interest and cash increased. At their target date, most target date funds will almost exclusively be in short duration fixed income securities, cash, and cash equivalents. The usefulness of target date funds is clear in light of sequencing risk. If the retiree is unlucky, and the sequence of investment returns in the years preceding their retirement are negative they will suffer a significant reduction in their potential retirement income. Target date funds actively manage this risk.

Mr. Client’s son has just changed job and now works for a silicon valley based software company. As part of the onboarding process at his new company he has been asked to choose which funds he wishes to allocate to in his defined contribution (DC) plan. Mr. Client tells his son that he should take the time to sit down with the family financial advisor and create a custom financial plan that assimilates all areas of his finances. His son agrees that this would be a good idea but due to having limited bandwidth (new job, and a new baby to boot…), that he won’t be able to carve out the time for at least a couple of months. As a stopgap Mr. Client advises his son to allocate 100% of his contributions to the corresponding target date fund.

As his son is currently 30 years old, and sees himself in the workforce for another 35 years he chooses the Prudent Wealth Target Date 2057 Fund.