November 17, 2021
The ABCs of TDFs:
Tackling Some Common Questions about Target-Date Retirement Funds
No matter where you are on your retirement savings journey, it can feel overwhelming when you’re considering the different investment options available, especially if you’re new to investing.
As you look at your investment options, you might consider utilizing a Target-Date Retirement Fund (TDF). To help decide if this is the right option for you, below are some answers to the most common questions on TDFs.
- What is a TDF?
A TDF is a type of retirement investment alternative available in most employer-sponsored plans that allows participants to simplify the decision-making process of retirement investing. TDFs are generally structured as mutual funds. Most TDFs are structured as a fund of funds, meaning that they are a fund that invests in other mutual funds rather than in individual stocks or bonds. TDFs typically invest in equity mutual funds, bond funds and money market funds, which are generally allocated based on the participant’s approximate year of retirement, per the guidelines set forth in each TDF prospectus. That means the fund’s investment mix is rebalanced over time, and as a result, typically becomes more conservative in investment strategy as the target retirement year gets closer. What does the number in a TDF name represent?
The number (known as the target date) in the retirement fund’s name is the approximate year the fund expects investors in the fund to retire and begin withdrawing from their retirement plan account balance.
For example, a 2025 TDF expects that the participant is going to retire in the next four years. It generally has a more conservative asset allocation (a higher allocation to fixed income and a lower allocation to equities). Similarly, a 2065 TDF expects its investors to have 44 more years until retirement, so it typically has a lower allocation to fixed income and a higher allocation to equities. A higher allocation to equities may result in greater returns but at an increased risk. Please note that TDFs can differ in their approaches, so it is important that you read the prospectus, if available.What is the main difference between selecting a TDF versus setting my own asset allocation?
By providing a preset asset allocation and rebalancing annually, a TDF can help take the guesswork out of determining the asset allocation that aligns with your target retirement year. This can be helpful for less-experienced investors or for those who simply may not want to build or adjust their own asset allocation. In any case, you should monitor your investment fund choices periodically to ensure they continue to meet your long-term investment goals.
You can learn more about Mutual of America’s Target-Date Retirement Funds here.
The value of a Target-Date Retirement Fund is not guaranteed at any time, including at and after the target date. There is no guarantee that a Target-Date Retirement Fund will correctly predict market or economic conditions, and as with other mutual fund investments, you could lose money. In addition to a retirement date, individuals should consider their risk tolerance, time horizon, personal circumstances and complete financial situation before investing.