What Is a Target-Date Fund? A Simple Guide for Parents

A target-date fund is a single fund built around one year: the year you expect to need the money. It holds a mix of stocks and bonds, and it shifts that mix toward safer holdings on its own as the year gets closer. The year is usually in the name, like a "2045 fund" for someone planning to retire around 2045.

How the mix changes over time

The schedule a fund follows is called its glide path. Every fund company sets its own, but the shape is the same:

The trade-off between the two is covered in stocks vs. bonds.

"To" vs. "through" the target date

Glide paths come in two styles. A "to" fund reaches its most conservative mix at the target year and stays there. A "through" fund keeps getting more conservative for years after the target date, on the idea that a retiree will be spending the money over decades. Two funds with the same year in their name can hold quite different mixes, so read the fund's glide path before you compare.

What's inside one

Most target-date funds are a fund of funds: one fund that owns several others, often index funds covering U.S. stocks, international stocks and bonds. The fund rebalances them for you, so you never have to decide when to move money from stocks to bonds.

The cost is in the expense ratio, the yearly fee as a percent of what you've invested. It varies a lot between fund companies, and it's worth checking, because the fee is charged every year for as long as you own the fund. A target-date fund is usually structured as a mutual fund.

Where you'll see them

• Workplace 401(k) plans. They're a common default investment when you're enrolled automatically.
• IRAs and Roth IRAs, including a custodial Roth IRA for a child with a job.
• 529 plans. Most plans offer age-based or enrollment-year portfolios that work the same way, timed to when your child starts college instead of retirement. See 529 plans explained.
• Regular brokerage and custodial accounts, where you can buy one like any other fund.

Picking a year for a kid's account

The year should match when the money in that account gets spent, not your child's birth year.

• 529 plan: the year your child is likely to start college.
• Custodial Roth IRA: roughly the year your child might retire, which for a teenager today is several decades away.
• UTMA or UGMA custodial account: there's no built-in date, and the money becomes your child's at your state's transfer age. A retirement-dated fund may not match how the money will be used, so think about the goal first.

The trade-offs

• One size for everyone. Everyone in the 2060 fund gets the same mix, whatever their other savings or comfort with risk.
• Doubling up. Owning a target-date fund plus other stock funds can leave you with more stocks than the glide path intends.
• Taxes in a regular account. Inside a UTMA or other taxable account, the fund's own rebalancing can pay out capital gains that count as your child's income under the kiddie tax rules. Inside a 401(k), IRA or 529 that doesn't matter.
• No guarantee. A target-date fund can lose money, including near or after its target year.

Where MemoryBank fits

A target-date fund is one line on a statement with a lot underneath it. MemoryBank shows your child the funds in the accounts you've connected, with a plain explanation of what each one is, so "2060 fund" turns into something they can understand.

This article explains how target-date funds work; it isn't a recommendation of any fund. MemoryBank is not a brokerage. It cannot receive, keep or transfer securities. For choosing investments, talk with a financial professional.

Frequently asked questions

What is a target-date fund in simple terms?

It's a single fund built around the year you'll need the money. It holds a mix of stocks and bonds and gradually shifts toward bonds and cash-like holdings as that year approaches, so you don't have to rebalance it yourself.

What is a glide path?

A glide path is the schedule a target-date fund follows for moving from mostly stocks to mostly bonds as its target year approaches. Each fund company sets its own, so funds with the same year can hold different mixes.

What is the difference between a 'to' and a 'through' target-date fund?

A 'to' fund reaches its most conservative mix at the target year and stays there. A 'through' fund keeps getting more conservative for years after the target date, assuming the money will be spent over a long retirement.

Can you lose money in a target-date fund?

Yes. Target-date funds hold stocks and bonds, which can both fall in value, and there's no guarantee of any balance at or after the target year.

Are 529 age-based portfolios the same as target-date funds?

They work the same way. Age-based or enrollment-year portfolios in a 529 plan start with more stocks and shift toward bonds and cash as your child's expected college start date approaches.

Can my child see what's inside their target-date fund in MemoryBank?

MemoryBank shows your child the funds in the accounts you've connected, with a plain explanation of what each one is. It doesn't hold or move money.

What to do next

1. Look up the glide path and expense ratio for any target-date fund you already own.
2. Check that the year matches when that account's money will be spent.
3. Read your kid's first portfolio for the other decisions that go with it.