What are target date funds 101?

Target date funds let you invest in a broad range of securities and asset classes and are designed to reduce your exposure to riskier investments as your retirement date approaches.

Target date funds try to provide a simpler approach to retirement investing. Specific target date funds are generally divided into five-year increments (2030, 2035, 2040, 2045, etc.), making it easy to select a fund that aligns with when you plan to retire.

Just like many mutual funds and ETFs, a target date fund may invest in a mix of stocks, bonds, ETFs, and other assets. The primary difference is that a target date fund’s allocations to different asset classes gradually shifts to reduce risk as the target date gets closer. This adjustment process is determined by the fund’s particular glide path, which is a formula that each fund utilizes to determine the mix of underlying investments.

Here’s an example of a target date fund in action:

• Say it’s the year 2025 and you’re just entering the job market at age 22. You plan to retire at 67 after 45 years of work. You might select a target date fund for 2070. That fund would be heavily invested in the stock market today but would gradually shift the asset allocation to potentially less volatile and more income oriented assets like bonds and fixed-income ETFs as 2070 gets closer.

Target date funds can help make investing simpler while seeking to protect your portfolio as you approach retirement. With target date funds, you get:

• Simplicity: Simply choose your retirement date to get a diversified portfolio.
• Automatic adjustments: Target date funds rebalance your asset allocations over time in an effort to seek growth in the early years and potentially protect against unexpected downturns in later years.
• Diversification: Target date funds typically invest in a wide variety of underlying securities across different asset classes, potentially giving you exposure to different stocks, bonds, and more.

While target date funds can help reduce the risk, consider the following:

• Risk: Target date funds are not risk-free. Indeed, target date funds are not guaranteed to achieve their objective or to protect your principal investment. Their performance can vary depending on the market, even as you near retirement.
• Uncertain returns: Just like stocks or mutual funds and ETFs, target date funds don’t guarantee a specific return on investment. This can make it difficult for some people to map out their retirement budget.
• Subject to change: Target date funds have to be monitored like any other investment. A manager for a target date fund may adjust the fund’s glide path at any time.

Not all target date funds are created equal. There are several different types based on the underlying investment strategy:

• Active: This type of target date fund uses funds that are actively managed by portfolio managers who select specific investments.
• Passive: This type of target date fund uses passively managed funds that attempt to mirror the performance of a market index.
• Combination: This type of target date fund uses both actively managed and passively managed funds.

• Closed architecture: This means the target date fund provider only invests in its own funds.
• Open architecture: This means the target date fund provider can invest in its own funds along with funds from other providers. This could offer more investing choices.

While both an individual retirement account (IRA) and a target date fund can help you save for retirement, each has a separate role to play.

• An IRA is an investment account that allows investors to save for retirement on a tax-deferred basis. While an IRA can help make it easier to save for retirement, it is an account. You generally still have to choose the investments in the account.
• A target date fund is an investment solution that allows you to save without constantly reviewing and adjusting your portfolio. You can invest in target date funds using your IRA or your regular brokerage account and can use the fund to target retirement or other time-based events. Please note: target date funds do not allow you to invest on a tax-deferred basis unless you invest in such funds in an IRA or other tax-advantaged account.

Finding a target fund with E*TRADE is simple.

• Search all target date ETFs available through E*TRADE (choose ‘Life Cycle’ in the Fund Category)
• Search all target date mutual funds available through E*TRADE (choose ‘Life Cycle’ in the Fund Category)

CRC# 4033443 12/2024