You can invest in a target date fund in consultation with your financial professional, in a tax-deferred, tax-free, or taxable account. In addition, you may find target date funds offered in your 401(k) or other employer-sponsored retirement plan. These funds are increasingly included among plan options, and employers who use automatic enrollment may select target date funds as the default investment. That’s the one into which contributions go unless you choose an alternative.
To use a target date fund in your traditional or Roth IRA,
you must confirm that the brokerage firm, bank, mutual fund company, or other financial services company that serves as your IRA custodian offers target date funds. In a 401(k), the plan sponsor selects the target date funds that will be offered — generally those provided through the same investment company or companies whose other funds are available in the plan.
You may also invest in a target date fund through a taxable account, especially if you're not eligible for an employer-sponsored plan and you’ve already contributed as much to your IRA as you can for the year. In this case, you purchase the target date fund as you would any other mutual fund.
Comparing target date funds
When you’re considering a target date fund, it’s important to make sure that the fund’s holdings are diversified across different subclasses and include international as well as domestic funds. The equity portion of the portfolio should include funds that focus on a variety of market capitalizations.
Similarly, the fixed income portion should include funds investing in different issuers, different terms, and different credit ratings. You can find these details and other essential information in the fund prospectus.
It’s a good idea to look not only at the roster of funds for the specific target date fund you’ll select — say 2030 — but also at the rosters for funds that mature in 2015, 2020, and 2025. That will give you a sense of how the portfolio is likely to evolve as time goes by.
Evaluating target date funds
Evaluating the performance of a target date fund can be more difficult than evaluating individual funds. Since different investment companies create their target date funds of funds with different combinations of individual funds, no single index is completely accurate as a benchmark for a target date fund’s performance. Additionally, because target date funds are relatively new, there’s insufficient data to provide a barometer of performance in one or more full market cycles.
One approach is to use relevant benchmarks to analyze the performance of the individual funds that make up a target date fund’s overall portfolio. While you may not be certain what percentage of the target date fund’s assets are allocated to a specific fund at any given time, if individual funds stack up favorably against their relative benchmarks, it’s an indication that the target date fund is on track.
Target date fund fees
The expense ratio of a target date fund includes fund management fees plus the fees for the individual funds. That means it may be a little higher than what you’d pay if you bought each of the funds in the portfolio separately. However, target date funds typically cost about the same as other actively managed funds of funds. You should carefully consider the fees listed in the fund’s prospectus to make sure the target date fund is worth the cost. While higher fees reduce your returns, the benefit of having your retirement investing professionally managed may make a target date fund worthwhile.
Beyond the target
The way a target date fund is invested after maturity will affect what happens to the assets you’ve accumulated and influence the income you may have at your disposal during retirement. Many investment companies keep the fund open for several years beyond the target date, gradually reducing the percentage allocated to stock funds to around 20% before merging the fund with an income-producing fund.
More aggressive fund sponsors may prolong this post-target period for as long as 30 years, maintaining a portfolio with a significant percentage of stock funds. On the other hand, conservative companies may plan on completely eliminating equity funds from the portfolio by the time the target date fund reaches maturity. When you’re considering a target date fund, you should make sure that its approach to handling your assets after maturity matches your goals and investment philosophy.
One and only or one of many?
One perspective on targeted investing is when you’re using a date-specific fund to invest for a specific goal, the fund should be your only investment for that goal. The idea is that, if you include other investments in the same account or portfolio, you’re throwing off the carefully plotted allocation that’s designed to help you reach your goal. Not everyone agrees, so this is something you’ll want to discuss with your investment professional.
If you select a fixed track in a state-sponsored
529 savings plan,
you’re essentially investing in a target risk fund, although it probably won’t be referred to in those terms.
You can invest in a target date fund in consultation with your financial professional, in a tax-deferred, tax-free, or taxable account. In addition, you may find target date funds offered in your 
