What Is A Target Date Fund?

Target date funds came into existence three years prior to 2006. And what’s so critical about 2006 is that the Pension Protection Act introduced an item called qualified default investment alternative, or QDIA, which basically gave fiduciary relief for employers who choose to default a participant’s contribution into an investment. And that investment will be able to be invested in multi-asset portfolios. Target date funds became the sort of go-to investment since 2006. Since then, it has become the most important investment in any retirement plan because, many participants or workers are just not that engaged. Whatever contribution they have is defaulted into it and employers get to have fiduciary relief. In other words, employers won’t get in trouble if that fund or that group of funds does not perform as well as anticipated by the participants.

The idea is that a target date fund starts out life for the youngest group of employees, 25- or 26-year-old individuals, at the highest level of risk assets, such as stocks. Over one’s lifetime, as one gets older and gains more assets in their portfolios, the amount of high risk assets reduces for a number of reasons. Most often quoted for reduced risk assets is the inability for you to make up losses as you get closer to retirement because you don’t have another 30 years in the workforce. Target date funds were an easy, logical, simple way to invest participant money.

Additionally, over the last 20 years, there have been a lot of lawsuits regarding fees, resulting in target date funds fees significantly dropping:

It’s low cost.
It’s easy.
It’s simple.

But the problem with target date funds is that five-year cohorts are all invested in the same target date – men, women, lots of money, no money, making lots of contribution, making no contribution, good saver, bad saver – it doesn’t matter, you’re all lumped into one. 

They construct target date funds by using average participant information. So, that means everybody, whether you are average or not, and we know no one is average, you end up on the same glide path.

The same way from high equity to low equity, from high risk to low risk, regardless if it is right for you or not.

Fast forward 20 years with technological advancement and many other things, target date funds are sort of something of the past. Today, there are ways that we could use participant data to personalize a target date just for you.

In other words, we can build a personalized target date fund using your data unique to you, and not unique to 5 million other people within the five-year bandwidth of your age, without costing a nickel more than a traditional target date fund. It just makes sense. Personalization is the new thing and is now available for target date funds. There’s one particular one that we favor called the iGPS: Individualized Gide Path Solution.

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