Fenner, Melstrom & Dooling PLC
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Target Date Funds as an Investment Choice for Retirement Plan Sponsors
A target-date fund is a mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. TDFs are designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches.
TDFs are on the short list of qualified default investment alternatives (QDIAs). Department of Labor (DOL) regulations allow retirement plan sponsors to put contributions by plan participants who do not specify investment choices into a QDIA without being responsible for investment losses. That’s a prime reason for the growth of TDFs.
Example: Lynn Martin, age 40, begins a new job at a company with a 401(k) plan that includes a TDF series. Lynn plans to retire at 65, so she chooses the TDF dated 2040, when she will be 64.
A TDF typically will be a fund of funds. Thus, Lynn’s chosen TDF includes a variety of stock funds and bond funds, currently allocated in a manner that the fund company believes is suitable for someone 24 years from retirement.....