Slides for Part 1 of webinar about Target Date Mutual Funds: https://learn.extension.org/events/2030#.VWRoqU3bKM8

1. The Ins and Outs of Target Date
Funds and the New L Funds TSP
Default Option- Part 1
https://learn.extension.org/events/2030#.VQwbhk0tGM8
Barbara O’Neill, Ph.D., CFP®
Rutgers Cooperative Extension

2. Workshop Objectives-
Part 1
 Learn background, history, and characteristics of
target date funds
• Learn advantages and disadvantages of target date
funds
• Learn the difference between target date (lifecycle)
funds and lifestyle funds
• Learn how glide paths work
• Learn about target date fund resources

3. Question #1:
Do you invest in target
date mutual funds? If so,
which one(s)?

4. Take-Away #1:
TDFs become more
conservative automatically

5. What is a Target Date Fund
(a.k.a., Lifecycle Fund)?
• Diversified mutual fund portfolio consisting of 3 asset
classes: stocks, bonds, cash equivalents
• Asset allocation automatically adjusts; becomes more
conservative (less stock) over time
• Typically “fund of funds” with underlying funds from the
same fund family
– Vanguard Target Retirement Funds
– Fidelity Freedom Funds
– Thrift Savings Plan (TSP)

6. Target Date (Lifecycle) Funds
vs. Lifestyle Funds
• Two different types of mutual funds that are often confused
due to similar names
• Both are “all-in-one” portfolios containing several different
asset classes
• Target date (Lifecycle) funds have a future date in their
name and automatically adjust from an aggressive to a
conservative asset allocation over time
• Lifestyle (a.k.a, target risk) funds have different portfolios
with different asset allocation % weightings; investors choose
a portfolio to match risk tolerance level; portfolio won’t adjust
over time (investors would need to change portfolios)

7. Target Date (Lifecycle) Funds vs.
Lifestyle Funds
Lifecycle (Target Date)
• Manages money toward
an investor’s future
target date
• Takes the guesswork
out of the process of
reducing investment risk
over time
• Low maintenance
approach
Lifestyle (Target Risk)
• Manages money
according to investor’s
risk tolerance level
• Provides more consistent
exposure to a certain
amount of risk over time
• Requires investor
decisions and action to
make changes

8. Distinguishing Trait:
Mutual Fund Name
Lifecycle (Target Date)
• Generally identified by
a DATE in their title
• Examples: 2020 fund,
2030 fund, 2050 fund,
etc.
Lifestyle (Target Risk)
• Generally identified by a
RISK LEVEL WORD in
their title
• Examples: Growth
Fund, Moderate Growth
Fund, Conservative
Growth Fund, Income
Fund (Vanguard)

9. Selected Trade Names
Lifecycle (Target Date)
• Vanguard Target
Retirement Funds
• Fidelity Freedom
Funds
• T. Rowe Price
Retirement Funds
Lifestyle (Target Risk)
• Vanguard LifeStrategy®
Funds (4 portfolios)
• Fidelity Asset Manager®
Funds (7 portfolios)
• T. Rowe Price Personal
Strategy Funds (3
portfolios)

10. More About Target Date Funds
• Also referred to as “age-based” funds
• Target date is the year an investor plans to retire and
stop making new deposits to fund (+/-) 5 years
– Dates spaced at 5- or 10-year intervals (2030, 2035, etc.)
– If retiring in between two target dates, can choose one or
the other nearest date or a combination of two close dates
Example: If planning to retire in 2022, could use a 2020 fund
or 2025 fund or both
– If a conservative investor, “go shorter” (2020)
– If an aggressive investor, “go longer” (2025+; more stock )

11. Sample Target Date
Mutual Fund Portfolios

12. More About Target Date Funds
• Equity and fixed-income assets in one mutual fund
• Vanguard and Fidelity are two largest suppliers of
target date funds; composition and expenses vary
– Vanguard includes passively managed (index) funds
– Fidelity includes actively managed funds
• Only make sense if they include most of your
retirement investments
– Otherwise, you alter your overall asset allocation and
contradict the whole premise of using TDFs

13. Take-Away #2:
Three key performance
factors are fees, underlying
funds, and glide paths

14. Question #2:
What is a target date fund
glide path?

15. More About Target Date Funds
• Have gained popularity in last decade
• Popular “qualified default investment alternative”
(QDIA) for tax-deferred employer retirement plans
• Typically formed as open-end investment companies
• Defining characteristic is glide path, which determine
asset mix of the fund over time

16. More About TDFs as QDIAs
• Default investments are especially important in
employer retirement plans with automatic enrollment
• Some employees who are enrolled in employer
retirement plans fail to provide instructions for
investing their deposits
• If workers do not select investments for their
retirement account, employer puts money in the
default investment
• U.S. Department of Labor approved TDFs as an
appropriate Qualified Default Investment Alternative

17. The Glide Path is Critical!
• Determines starting target date fund asset allocation
and how quickly it will change
• Generally becomes more conservative over time
• Three key elements:
– Initial equity allocation
– Slope of the glide path
– Equity landing point (i.e. date after retirement when the equity-to-
fixed-income ratio remains unchanged throughout rest of retirement)
http://www.pionline.com/article/20140818/PRINT/308189983/some-
target-date-funds-are-boosting-equities

18. Glide Paths Vary Among
TDF Providers
• Glide path: how equity (stock) % changes over time; a critical
determinant of wealth creation outcomes
• Found in both TDFs for retirement and age-adjusted portfolios
in 529 college savings plans
• Each TDF provider establishes its own glide path and glide
paths can vary considerably
• Three glide path methods:
– Straight line: Steady, linear approach to gradually reduce stocks
(Vanguard and TIAA-CREF)
– Stepped: Equities allocation is periodically adjusted in stages (ING)
– Rolldown: High equity level until about 20 years before retirement and
then a sharp reduction begins (Fidelity)
http://www.bogleheads.org/wiki/Glide_paths

19. Glide Path Illustrations
Straight Line
Stepped
Rolldown
Source:
http://www.bogleheads.org/wiki/Glide_paths

20. “To” and “Through” Glide Paths
• “To” Glide Path- Assumes that retirement age is the
target date; at that point, the portfolio’s stock % and
investment mix remains static
• “Through” Glide Path- The equity allocation
continues to decrease for a designated number of
years after retirement before leveling off
• Landing Point- The point in the glide path where the
TDF reaches its lowest equity allocation
• TDFs with different glide paths and landing points
have very different risk profiles

21. Through Retirement TDF With
25 Year Stock Landing Point
Source: U.S. Securities and Exchange Commission

22. Question #3:
What type of glide path
does your TDF have? The
TSP L fund?

23. Take-Away #3:
Performance among TDFs
can vary dramatically

24. TDF Industry Examples
http://www.wealthinformatics.com/2011/04/17/do-you-
know-your-target-retirement-funds-glide-path/
Describes starting equity %, type of glide path, and
equity landing point for five TDFs
• Fidelity Freedom
• Vanguard Target Retirement
• T. Rowe Price
• TIAA-CREF
• ING Solution

25. More About Target Date Funds
• As an “all-in-one” investment, should have exposure
to wide range of asset classes
– Fidelity uses 23 underlying mutual funds
– Vanguard uses 3 broad index funds
• Key factors to consider
– Fund’s investment style
– Fund’s historical performance
– Fund’s fees and expense ratio
http://www.investopedia.com/articles/mutualfund/05/051005.asp

26. Investment Style
Target Date Fund Itself
• Strategic vs. Tactical
– Strategic: Rebalance portfolio to target asset %s
– Tactical: Change portfolio in response to current
market conditions
Underlying Mutual Funds
• Active vs. Passive
– Active: Use actively managed funds to try to
outperform benchmark index
– Passive: use index funds to track a benchmark
index

27. More About Target Date Funds
• Fastest growing asset class used in employer defined
contribution (DC) plans
• Make up about 20% of DC plan market
• $670.6 billion in TDF assets in 2014
• TDF assets could double in size by 2018
• TDF suppliers include Vanguard, Fidelity, T. Rowe
Price, BlackRock, JP Morgan, Principal Financial, and
American Funds
http://online.barrons.com/articles/SB50001424053111904544004579651134019266274

28. Target Date Fund Evolution
Process: 1980s-2013
• 1980s: 401(k)s become a supplemental retirement
savings plan; 3-legged stool of Social Security, a
defined benefit pension, and savings is still intact
• 1990s: Beginning of the “do it yourself” retirement
model; more 401(k)s introduced as sole retirement
plan and fewer DB pensions
• 2000s: “Do-it-for-Me” model introduced and TDFs
gain popularity; defined contribution (DC) plans
become primary retirement savings vehicle

29. Target Date Fund History
• First target date funds created in 1994 by Wells Fargo and
Barclays Global Investors
• Responded to 401(k) plan participants’ failure to prudently
manage their retirement plan portfolios for 10+ years
• Plan participants wanted someone to make 401(k) investment
and asset allocation decisions for them
• Institutions needed to develop a strategy to use with millions
of plan participants
• Participants were aggregated into age-based cohorts
http://www.ucs-edu.net/cms/wp-content/uploads/2014/04/I_ABriefHistoryOfTargetDateFunds.pdf

30. More Target Date Fund History
• 1996: Fidelity Freedom TDFs
• 2001: Principal LifeTime TDFs
• 2002: T. Rowe Price Retirement TDFs
• 2003: Vanguard Target Retirement TDFs
• 2006: Pension Protection Act (2007 for final regs)
lead to increased use of TDFs in DC plans
– Created a “safe harbor” for TDFs as a Qualifying Default
Investment Alternative in auto-enrollment DC plans
• 2008: Performance issues raise concerns by SEC
and investors, especially for near-term (2010) TDFs

31. More Target Date Fund History
• 2008- TDF investors and regulators became very
aware that “all glide paths are not created equally”
• 2009- SEC and Department of Labor hearings on
TDFs; critics claimed TDFs were not as
conservatively positioned as their names implied
• 2010- New TDF disclosure rules published by the
SEC, including better description of glide paths
• 2013- 36 target date mutual fund firms; 2010 TDFs
were only category to “leak” assets (retiring boomers)
• 2015- L fund becomes TSP default option (10/15)
http://corporate.morningstar.com/us/documents/MethodologyDocuments/Meth
odologyPapers/2014-Target-Date-Series-Research-Paper.pdf

32. Take-Away #4:
Knowing a TDF’s glide path
is critical to understanding
its risk profile

33. Target Date Fund (TDF)
Advantages
• Provide diversification across asset classes
• 5- or 10-year intervals to meet a variety of needs
• Generally designed to be a continuing investment for
investors during retirement
• Investors do not have to buy a fund that matches their
presumed retirement date (free choice to decide)
• Can buy for taxable and tax-deferred accounts (if
offered as an employer plan option)

34. More Target Date Fund (TDF)
Advantages
• Fund managers make all asset allocation decisions
• Many TDFs have low required minimum
investments (e.g., $1,000 for Vanguard)
• Increasingly being offered as default option in tax-
deferred employer retirement savings plans
• Offer a “low maintenance path” for investors who
don’t know where to start
• Like any other mutual fund, subject to Investment
Company Act of 1940 regulation (SEC)

35. Target Date Fund (TDF)
Disadvantages
• Do not address individual risk tolerance levels
• Do not guarantee sufficient retirement income
• As with any investment, TDFs can lose money
• Sometimes (e.g., 2008) all asset classes lose value
simultaneously; 2010 funds lost 30% on average
• Two layers of fees: TDF and underlying funds
• Can’t make “apples to apples” comparisons
• Extended glide paths may leave investors exposed
to more risk than they want

36. Take-Away #5:
TDFs work best for your
entire retirement savings

37. Other Key Points
• Small differences in fees can translate into large
differences in returns over time
• Consider a TDF’s asset allocation over the whole life
of the fund
• Consider a TDF’s inflation protection
• Compare the % of stock at a TDF’s most aggressive
and conservative investment mix
• Consider the number of underlying funds in a TDF
• Seek out TDFs with expense ratios < 0.84% (industry
average)

38. Future TDF Projections
• Expected to hold 35% of 401(k) assets by 2019;
(13.5% in 2013 according to Cerulli Associates):
http://www.wsj.com/articles/fears-about-target-funds-
1425870191
• Vanguard projects that, by 2016, 55% of all plan
participants and 80% of new plan participants will be
invested entirely in a TDF:
http://www.benefitspro.com/2012/06/26/vanguard-
managed-retirement-accounts-increasing-in

39. Target Date Fund Resources
• Investment Company Institute:
http://www.ici.org/pubs/faqs/faqs_target_date
• U.S. SEC and Department of Labor:
http://www.dol.gov/ebsa/pdf/TDFinvestorbulletin.pdf
• Investopedia: http://www.investopedia.com/terms/t/target-
date_fund.asp and
http://www.investopedia.com/articles/mutualfund/05/051005.asp
• U.S. SEC: http://www.sec.gov/investor/alerts/tdf.htm
• eXtension: http://www.extension.org/pages/63010/monthly-
investment-message:-february-2012#.VQyJak0tGM8

40. Before You Invest in a TDF
• Examine a fund’s fees
• Review a fund’s past performance
• Understand a fund’s glide path and stock % landing
point; is it a “to” or “through” retirement TDF?
• Understand a fund’s strategy and its underlying
assets; are they active or passive funds?
• If in a taxable account, know the minimum deposit
• Read the prospectus!

41. Key Take-Aways
• TDFs become more conservative automatically
• Three key performance factors are fees, underlying
funds, and glide paths
• Performance among TDFs can vary dramatically
• Knowing a TDF’s glide path is critical to
understanding its risk profile
• TDFs work best for your entire retirement savings
– Many investors combine TDFs with other investments

42. Key Take-Away Applications
• Decide if the simplicity and automation of TDFs is
attractive to you and/or your clients/students
• Read a TDF prospectus to understand TDF fees,
composition, glide paths
• Compare the performance of at least three
comparable TDFs (e.g., three 2040 funds)
• Compare the glide path of at least three
comparable TDFs (e.g., three 2040 funds)
• Consider repositioning current, unfocused
retirement savings into a TDF

43. Key Soundbite
Investors should know what
they are buying because not
every target date fund with
the same date is the same.

44. Question #4:
Any final questions about
TDFs? Put Qs in the chat
box and I’ll answer them.