A Target date fund - also known as a lifecycle or age-based fund - is a collective investment scheme, usually a mutual fund, designed to provide a simple investment solution through a portfolio whose asset mix becomes more conservative as the target date (usually retirement) approaches.
Lifecycle funds were first introduced in the early 1990s with Wells Fargo and BGI being the first major institutions to offer such products. Their popularity has increased significantly in recent years due in part to the Pension Protection Act of 2006.
These funds are aimed at people planning for retirement and have appeal because they provide a guaranteed value at a specific time. For instance, a 2020 target dated fund provides exposure to some form of growth security (US equities, international equities) while guaranteeing the original investment provided the fund is held to maturity.
In some cases, these funds also have a guarantee that rises with the market value of the fund, locking in gains monthly, or in some cases daily.
However, almost all target date funds do not have any guarantee.
The funds' allocation moves toward emphasizing cash and fixed income elements as the funds approach their maturity dates. By reducing exposure to the growth elements, the risk of a sudden drop in the market affecting retirement date diminishes. However, too much emphasis on security may prevent a fund from outpacing inflation and postpone retirement. The speed with which a target date fund moves its asset allocation is known in the industry as the "glide path", using the analogy of an airplane (the fund, presumably) coming in for a landing (the landing being, presumably, arriving at the Target Date with the appropriately low-risk mix of underlying assets).
The funds are not without their critics, who point to the tendency for additional costs to be associated with target date funds, the reduced opportunities for growth over time, and the fact that the probability of negative returns from equity markets in general over a period of several years is relatively low.[1]