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How do Target Date Funds work?

Target Date funds are a series of vintages where the vintages represent a future year that an investor wishes to reach their target. With regards to retirement this is an investors expected retirement date. 

Will McGough

By Will McGough on September 30, 2019



 

Target Date Funds are a series of vintages where the vintages represent a future year that an investor wishes to reach their target. With regards to retirement this is an investor’s expected retirement date.  Series typically have an Income strategy for folks in retirement and any number of future retirement years (vintages).

 

Vintages are defined as YYYY, and typically are grouped in either 10 year lots years ending on the 10s or 5s. Or every 5 years as the lots.  For example:

 

 

 

 

 

 

 

 

 

 

 

 

 

A Target Date Fund vintage follows the Target Date series glide path.  With glide path year 0 representing when an investor wants to retire, we can convert each vintage into a glide path year by the following process:

 

Target Retirement Date (YYYY) – Previous Calendar Year End Date (YYYY)

 

Target Date Funds use previous calendar year end date as the target date fund must be suitable for people who turn their retirement age during the next calendar year, so think of everyone’s birthday as December 31st.  So, on 12/31/2010, a 2010 funds would go away…. But, target date funds are not of annual build, but every 5 or 10 year build, so that a 2010 fund would run through 12/31/2014 assuming a series has a 2015 fund, make sense?

 

As the 2010 fund gets into 2011, 2012, and so on, its glide path year goes from ZERO, to -1, -2, etc. This is called through retirement.

 

Each year, as the target date fund ages 1 year older, it follows its pre-prescribed methodology for how much equity it should sell to rebalance toward a lower risk portfolio with more fixed income (and/or alternatives).  This plan of asset allocation over time is the glide path.

 

To review:  Target Date funds are built on the premise of annual rebalances toward less aggressive portfolios so that over time the target date fund is in its most conservative mix when it reaches its target year, which is when an investor may choose to retire.

 

Will McGough

Author: Will McGough

Chief Investment Officer of Retirement Will McGough joined Stadion Money Management in 2003 and currently serves as Chief Investment Officer of Stadion’s Retirement investment strategies which comprises oversight of Stadion’s risk-based, target date, and managed account strategies. He is a member of the Investment Committee and Senior Management team, and serves as as Stadion’s Chief Investment Officer, Retirement. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Will received his BBA in Finance from the University of Georgia and also holds the Chartered Financial Analyst designation. Will is a member of the CFA Institute, the CFA Society of Atlanta, the American Association of Professional Technical Analysts, National Association of Active Investment Managers, the UGA Alumni Association and National Eagle Scout Association.

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Will McGough
Written By:

Will McGough

Chief Investment Officer of Retirement Will McGough joined Stadion Money Management in 2003 and currently serves as Chief Investment Officer of Stadion’s Retirement investment strategies which comprises oversight of Stadion’s risk-based, target date, and managed account strategies. He is a member of the Investment Committee and Senior Management team, and serves as as Stadion’s Chief Investment Officer, Retirement. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Will received his BBA in Finance from the University of Georgia and also holds the Chartered Financial Analyst designation. Will is a member of the CFA Institute, the CFA Society of Atlanta, the American Association of Professional Technical Analysts, National Association of Active Investment Managers, the UGA Alumni Association and National Eagle Scout Association.


There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.

 

The commentary, analysis and opinions expressed are those of Stadion’s Investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.

 

Investors must make their own decisions based on their specific investment objectives and financial circumstances. Stadion Money Management, LLC (“Stadion”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Stadion’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.

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