Target-date funds have become a cornerstone of retirement planning, garnering increasingly large fund flows as investment firms capitalize on shifting demographics and a growing preference for simplified, hands-off solutions.
Key Takeaways
- A target-date fund is an investment vehicle that automatically and gradually adjusts its asset allocation to become more conservative as your target retirement date draws near.
- Target-date funds are professionally managed, low cost and highly diversified. They make the most sense for risk-aware investors who lack the time and expertise to actively manage their retirement portfolios and prefer a set-it-and-forget-it approach.
- Target-date funds have become a mainstay in retirement plans, growing from $70 billion in 2005 to nearly $3.8 trillion in 2024. That said, there is room for significant growth, as evidenced by the fact that these funds comprise less than a third of total 401(k) assets.
- Investment firms are working hard to drive greater adoption of target-date funds and secure the consistent, recurring management fee revenue they generate. To do so, they are employing robust marketing campaigns and enhancing their product offerings to improve retirement outcomes.
Target-date funds, also called life-cycle funds, have become a mainstay in retirement platforms, largely due to the growing demand for high-quality, low-maintenance investment solutions. These vehicles, which are available in tax-advantaged retirement accounts, such as 401(k) plans, 403(b) plans and individual retirement accounts, are designed to be long-term investments for individuals with particular retirement dates in mind.
TDFs combine several types of stocks, bonds, alternative investments and cash equivalents into a single solution that dynamically shifts from a primarily growth-oriented perspective early in your career to a more conservative income-oriented perspective as you draw closer to retirement. Along the way, they ensure you are adequately diversified within each asset class.
The best TDF providers do this very inexpensively, facilitating the generation of risk-adjusted returns that few people can achieve on their own. Read on to learn more about TDFs and why investment firms are betting big on these vehicles.
The Surge of Target-Date Funds
According to the Investment Company Institute, investments in TDFs grew to nearly $3.8 trillion in 2024, up from $70 billion in 2005. The surge has been fueled by shifting demographics, a growing preference for hands-off retirement solutions and the inclination of many retirement plan sponsors to make these vehicles the default option for their platforms.
The U.S. Census Bureau projects that all baby boomers will have reached the age of 65 by 2030. For years, investment firms have sought to capitalize on this trend by introducing and expanding their TDF offerings. TDF providers have gained even more ground by simultaneously promoting life-cycle solutions to millennials, now the largest generation in the workforce. The marketing effort has also gained traction with tech-savvy, cost-conscious Generation Z workers, who prioritize automated, low-maintenance investments.
The common denominator among these cohorts is behavioral. Most investors lack the time and expertise to actively manage their retirement portfolios and prefer a set-it-and-forget-it approach. Investment firms know this, and they have strategically sought to address this preference with TDFs. They have made tremendous progress.
According to a recent study by the U.S. Government Accountability Office, the share of 401(k) plans offering TDFs increased from 42% in 2006 to 84% in 2020 and the proportion of assets invested in TDFs grew from 3% to 28%. Moreover, the vast majority of plans offering TDFs make these vehicles the default option for plan participants.
Why Investment Firms Are Betting Big on Target-Date Funds
Investment firms have benefited from the rise of TDFs, but they have realized just a fraction of the long-term profit potential. TDFs generate consistent management fees, and reliable, recurring revenue is invaluable in the ultracompetitive investment management market. Not surprisingly, every big investment firm is scrambling to drive up its TDF business and grab as much market share as possible.
Investment industry experts are projecting TDFs to grow by 12% annually through 2030, pushing total TDF assets to well over $7 trillion.
Communicating the utility and simplicity of TDFs to retirement plan sponsors and plan participants has been the most common approach to drive adoption, but there is also a mounting effort to enhance product offerings. The most competitive TDF providers are improving their strategies and introducing products that embrace a wider array of asset classes and offer more customizable asset allocations and glide path elections. The goal is to strengthen relationships, cultivate brand loyalty and improve retirement outcomes.
As firms refine their offerings, TDFs are likely to exhibit greater levels of personalization, increasingly economical fee structures, and the integration of environmental, social and governance factors. Additionally, many TDF providers are looking to introduce annuity-linked TDFs as a way to provide lifetime income in retirement. The expansiveness of these innovations is hard to project, but advances in artificial intelligence and machine learning lead many to believe we are on the cusp of massive breakthroughs, which could significantly improve the retirement plans of tens of millions of Americans.
Closing Notes
The rise of TDFs reflects a broad-based shift in the retirement planning landscape. It is a direct response to the growing demand for low-cost investment solutions that offer automatic diversification and set-it-and-forget-it functionality.
Workers of all ages have embraced TDFs, but there is room for significant growth, as evidenced by the fact that TDFs comprise less than a third of total 401(k) assets. Not surprisingly, investment firms are working hard to drive greater adoption of these vehicles. Marketing the value proposition of TDFs has been the most widespread approach, but there is also a big push to enhance product offerings, optimize the investor experience and improve retirement outcomes.
Retirement plan sponsors have been highly receptive to these efforts and are facilitating the growth of TDFs. As a result, the TDF market is expected to grow, and these vehicles will continue to play a pivotal role in retirement planning for decades to come.
Frequently Asked Questions
TDFs are professionally managed and offer savers a low-cost, highly diversified and risk-aware way to invest for retirement. They make the most sense for hands-off investors who want to reduce exposure to stock market volatility as retirement draws near.
TDFs are usually designed to become more conservative as retirement draws near. However, investment risks, including market volatility, interest rate risk, inflation and illiquidity, exist throughout the life cycle of any fund. Moreover, predicting when specific exposures will emerge is not feasible.
A glide path is an investment strategy that specifies how a fund’s asset allocation will be adjusted over time. For example, an investor with a 20-year investment horizon could employ a glide path that moves from a 100% equities allocation to a 60% equities and 40% bonds allocation over the course of 20 years.
A TDF may be structured to take you to or through retirement. Generally, a “to retirement” TDF will reach its most conservative asset allocation on the target date of the fund. After that date, the asset allocation typically does not change. Conversely, a “through retirement” TDF will reach its most conservative asset allocation after the target date of the fund. While these funds continue to reduce exposure to growth-oriented assets throughout retirement, they may not reach their most conservative point until the retiree is well past normal retirement age.
Still have questions?
Editor Norah Layne contributed to this article.
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