Retirement ready: The power of target date funds

February 12, 2025

Mike Reidy

Client Portfolio Manager

In the landscape of retirement planning, target date funds (TDFs) have emerged as a pivotal innovation. These funds are designed to simplify the investment process for individuals saving for retirement, catering specifically to the needs of those who may lack the expertise or time to manage their investment portfolios actively. TDFs automatically adjust their asset allocation, recognizing the gradual shift in focus from wealth accumulation to wealth preservation as the target retirement date approaches, providing a streamlined risk management and strategic investment solution.

As seen in the table above, total assets in target date funds reached very nearly $4 trillion in 2024 after reaching roughly $3.5 trillion in 2023. They have accounted for nearly all net inflows into the defined contribution space over the last five years— illustrating their emergence as the default option in retirement plans. Beyond just the previous decade’s bull market, there are several reasons for this growth: TDFs simplify investment decisions, provide automatic risk management over time, and serve as a compelling choice for participants who may otherwise struggle with actively deciding among an array of investment strategies.

How target date funds emerged as the default option

Inadequacy of single asset class lineups

Historically, many retirement plans often consisted of single asset class lineups—such as equities, fixed income, or stable value—but those usually failed to address the diverse needs of investors. These limited offerings frequently left individuals without the knowledge or motivation to effectively manage their risk exposure throughout their investment horizon. As a result, many participants in these plans remained unaware of how to adjust their portfolios based on changing market conditions or personal circumstances. A lot of young workers invested too conservatively, and investors nearing retirement found themselves investing too aggressively. Many simply selected the option with the best performance.

Evolution from target risk portfolios

Target risk portfolios were introduced as a solution to cater to different investor risk profiles. This solution was designed to maintain a constant risk level, regardless of an investor’s age. These portfolios, however, lacked the essential feature of automatic risk reduction as participants moved closer to retirement, often leaving individuals in higher-risk allocations longer than appropriate. The shortcomings of these traditional approaches underscored the need for a more dynamic solution—paving the way for the emergence of target date funds.

How target date funds operate

The glide path concept

The concept of a “glide path” is central to understanding how target date funds operate. The glide path refers to the gradual shift in asset allocation as the target retirement date approaches. Investors select a fund corresponding to their anticipated retirement date, which serves as the guiding framework for investment allocation. As the “target date” approaches, professional fund managers gradually shift away from riskier assets, such as equities, toward more conservative assets, such as bonds and cash equivalents. This gradual and automatic transition in a target date fund minimizes risk and aims to protect accumulated savings as investors transition from wealth accumulation to wealth preservation.

Simplicity and convenience

One of the most attractive features of TDFs is their simplicity. Instead of juggling multiple investments, individuals can invest in one fund that aligns with their anticipated retirement date. Furthermore, with investment professionals managing all major asset allocation and rebalancing decisions, the need for hands-on involvement from investors is practically eliminated. This “set it and forget it” approach is particularly valuable for busy, uninterested, or inexperienced participants who may not have the time or expertise to manage their investments actively.

Advantages of target date funds

Automatic asset allocation

Target date funds offer automatic asset allocation that continuously adjusts the mix of investments that can significantly benefit investors who don’t have the time to manage their savings. This dynamic approach allows for a smoother transition from growth-focused investing—typically favored in the early years of saving—to preservation-focused investing as retirement nears.

One of the standout features of TDFs is their glidepath, which assists participants in transitioning seamlessly from accumulation to wealth preservation as they near retirement. This built-in risk reduction is particularly advantageous for near-retirees, who may not have the time to recover from significant market downturns as the gradual shift towards more conservative investments helps to protect their savings as they prepare for retirement. An example of a typical glidepath is illustrated below.

Professional management, diversification and behavior

Experienced fund managers design TDFs by creating a well-diversified blend of equities, bonds, and other asset classes using a combination of strategic and tactical asset allocation. Strategic asset allocation establishes the fund’s long-term investment framework, determining the optimal mix of asset classes based on the desired risk and return profile over time. Tactical asset allocation, on the other hand, involves making shorter-term adjustments to overweight or underweight specific asset classes – such as small-cap stocks, international equities, high-yield bonds, credit risk or real estate -in response to market conditions and opportunities. This professional investment management aims to reduce concentration risk in any single asset type, enhance long-term return potential, and maintain portfolio resilience. By diversifying investments across multiple asset classes, TDFs can better navigate market volatility and potentially deliver more stable returns over time.

Experienced fund managers use strategic and tactical asset allocation to diversify investments, reduce concentration risk, and potentially deliver stable returns over time.

Investment managers are also responsible for regularly reevaluating their glide paths, especially in response to significant changes in financial markets. This process is often data-driven, involving an analysis of long-term capital market behavior and assumptions, including the risk and return profiles of various asset classes across historical and expected market cycles. To optimize outcomes for different risk levels, managers may also utilize accumulation and spending models to refine their strategies.

Behavioral finance is also something to monitor closely. Understanding how savers and investors behave is essential to optimal retirement savings outcomes. How do withdrawal rates and savings rates change? How do workers respond to market shocks and left-tail events that may lead to occasional and sudden drops in portfolio balances? If workers withdraw from risk assets too early in the wealth accumulation cycle, that can profoundly impact their retirement savings. Behavioral finance research tells us that certain age groups tend to have different risk tolerances. When that risk tolerance is breached in the form of a market drawdown, there is an increased chance of portfolio abandonment risk. This is a worst-case scenario: abandoning your retirement portfolio near a market bottom. Professional managers design the glidepath with this in mind to mitigate this risk.

Target date funds address one additional and potentially devastating aspect of behavior finance: human inertia. Target date funds turn the risk of “investing and forgetting” into an advantage, relieving savers of the responsibility to check on their risky investments as they age closer to retirement. Investors who do not derisk may suffer sequential return risk at the exact worst time of their retirement savings journey, right at retirement. The glidepath addresses human inertia by derisking automatically.

Ease of use for plan sponsors

TDFs have gained widespread adoption by plan sponsors due to their regulatory acceptance and cost-effectiveness. They serve as an efficient “plug-and-play” option for automatic default investments. This simplicity benefits sponsors and enhances the overall effectiveness of retirement plans, making it easier for participants to engage with their retirement savings. Moreover, TDFs help plan sponsors address their fiduciary responsibilities with far less effort than in the era before these portfolios were introduced.

Potential drawbacks and considerations

One-size-fits-all approach

Despite their many advantages, target date funds are not without their drawbacks. One concern often raised by prospective investors is TDFs one-size-fits-all approach. TDFs may not always account for individual investors’ unique risk tolerance or personal circumstances. This potential misalignment can lead to participants investing in funds that do not adequately reflect their unique financial goals or risk appetites.

Fees and expenses

While TDF managers provide professional management and rebalancing, these services come at a cost. Although fees have declined over the years, they can still represent a significant expense for investors, especially when compounded over time. Investors should be aware of these costs and assess whether the benefits of professional management outweigh the associated fees. One solution to this issue is the emergence of passive and hybrid TDFs, which typically offer lower fees to investors but often provide similar functionality, including glide paths, simplicity, and automatic asset allocation.

Need for periodic review

Although TDFs aim to simplify decision-making, it is essential for advisors and participants to periodically evaluate whether the chosen target date fund remains suitable for their evolving goals. Changes in personal circumstances, market conditions, or retirement objectives may necessitate adjustments to investment strategies, and regular reviews can help ensure the chosen TDF remains aligned with the investor’s needs.

Actionable recommendations

TDFs as a cornerstone of modern retirement plans

Target date funds have evolved into a cornerstone of modern retirement planning. For individuals who might otherwise remain in unsuitable allocations, TDFs provide a structured approach to investing that adapts to changing needs over time. Their automatic features and professional management make them an attractive option for many investors.

To maximize the benefits of TDFs, advisors should conduct ongoing due diligence. This involves ensuring that the glidepath and underlying fund structure align with each client’s unique financial and risk profiles. Customization, through separately managed accounts, can help mitigate the risks associated with the one-size-fits-all nature of TDFs, allowing for a more tailored approach to retirement planning.

Next steps

Regular plan reviews, fee analysis, and client education sessions are essential to optimize the use of ever-evolving types of target date funds within retirement portfolios. By better understanding the different flavors of TDFs and their potential impact on retirement savings, advisors can empower clients to make informed decisions that enhance their financial well-being.

To maximize TDF benefits, advisors should conduct ongoing due diligence, ensuring that glide paths and fund structures align with clients’ unique financial profiles.

Target date funds offer a compelling solution for retirement planning, addressing many of the challenges individual investors face. As retirement landscapes continuously change, TDFs stand out as a dynamic and effective tool for navigating the complexities of investment management. With the proper guidance and periodic evaluation, these funds can play a crucial role in securing a financially stable retirement for individuals across various demographics.

Asset allocation

Macro views

Disclosure

For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

Risk considerations

Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal. Equity investments involve greater risk, including heightened volatility, than fixed income investments. Fixed‐income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Lower-rated securities are subject to additional credit and default risks. Investment risk may be magnified with alternative investment strategies due to their use of arbitrage, leverage, and derivatives. Neither the principal nor the underlying assets of target-date portfolios are guaranteed at any time.

Target-date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target-date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither the principal nor the underlying assets of target-date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Neither asset allocation nor diversification can ensure a profit or protect against a loss in down markets. Be sure to see the relevant prospectus or offering document for a full discussion of a target-date investment option including determination of when the portfolio achieves its most conservative allocation.

Asset allocation and diversification do not ensure a profit or protect against a loss. The risk management techniques discussed seek to mitigate or reduce risk but cannot remove it. Inflation and other economic cycles and conditions are difficult to predict and there is no guarantee that any inflation mitigation/protection strategy will be successful.

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"These Terms & Conditions explain certain legal and regulatory conditions and restrictions in relation to the Principal Global Investors (Europe) Limited website, and in relation to the Principal Global Investors Funds (‘the Funds’). This information may be changed by Principal Global Investors at any time without notice.

In these terms and conditions, references to 'Principal Global Investors' means Principal Global Investors (Europe) Limited or any affiliate of the Principal Financial Group, Inc. or Principal Global Investors, LLC.

Before you proceed, you must acknowledge that you have read, and agree to, our terms and conditions.

Information in relation to the Principal Global Investors Funds is available through this web site to institutional investors resident in the following countries of: Belgium, France, Finland, Germany, Guernsey, Ireland, Italy, Jersey, Netherlands, Spain, Sweden, Switzerland and the United Kingdom. By proceeding this far you are representing and warranting that you are an institutional investor resident in one of these countries. Not all of the Funds are available in all these jurisdictions, and investors are directed to the Country Registration document for detailed information. What follows is not an offer or invitation to acquire an investment to, and should therefore not be relied upon by, any person anywhere other than the countries noted. Persons in respect of whom such prohibitions apply must not access this web site. This web site is reserved exclusively for non-U.S. persons and should not be accessed by any person in the United States.

Yes, I certify to be an institutional investor and resident of a country listed above.

Cookies
Use of cookies on this site is outlined in the Privacy and Security Policy. In accepting these terms and conditions, you accept the terms of the Cookie Policy and the use of cookies from this site.

Legal Entity Disclosure and Regulation
In Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland.

In the United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).

In Switzerland by Principal Global Investors (Switzerland) GmbH. This website is considered as advertising and information contained herewith be treated as such. Investors can obtain free of charge the prospectus, trust deed, the prospectus, the key investor information document (KIID), and the annual and semi-annual reports from the representative in Switzerland.

In Europe and United Kingdom, this website is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID and FCA respectively). If you are viewing the material as a retail investor, you should seek independent investment advice before deciding whether the products and services in question are suitable to meet your investment needs and objectives, as the language has not been complied to a retail client standard.

Principal Global Investors Funds
Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

Click ""Accept"" to indicate your acknowledgement and acceptance of Principal Global Investors Terms of Use and to continue."

This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Principal Investor Management (DIFC) Limited and the other member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.