Target date funds are mutual funds with a date in their name (e.g., 2030) and portfolios that change automatically according to a pre-determined glide path. Also known as lifecycle funds because they “age” as their investors get older, they have increased in popularity in recent years. Rutgers University professor and Extension specialist, Dr. Barbara O’Neill, will discuss the basics of target date mutual funds, including how they work, their advantages and disadvantages, historical performance, risk factors, and use as a default investment option in employer retirement savings plans. Kevin Laird will discuss the composition and characteristics of the Thrift Savings Plan (TSP) Lifecycle (L) fund available to service members and federal government employees. Also included will be a discussion of the upcoming change of using the L fund as the default TSP investment option.

1. The Ins and Outs of Target Dates Funds
& the TSP Lifecycle Funds
https://learn.extension.org/events/2030

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Find slides and additional resources under ‘event materials’

6. Dr. Barbara O’Neill
Dr. Barbara O’Neill, financial
resource management specialist
for Rutgers Cooperative
Extension, has been a professor,
financial educator, and author for
35 years. She has written over
1,500 consumer newspaper
articles and over 125 articles for
academic journals, conference
proceedings, and other
professional publications. She is
a certified financial planner
(CFPO), chartered retirement
planning counselor (CRPCO),
accredited financial counselor
(AFC), certified housing counselor
(CHC), and certified financial
educator (CFEd).

7. 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

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

9. What is a Target Date Fund
(a.k.a., Life-Cycle 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)

10. 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)

11. Lifecycle (Target Date) 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

12. 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)

13. 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)

14. 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 )

15. Sample Target Date
Mutual Fund Portfolios

16. 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

17. 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

18. 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

19. 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

20. 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

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

22. “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

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

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/
MethodologyPapers/2014-Target-Date-Series-Research-Paper.pdf

32. 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)

33. 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)

34. 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

35. 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)

36. 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

37. 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

38. 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!

39. 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

40. 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

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

42. Kevin Laird
Kevin Laird joined the staff of the Federal
Retirement Thrift Investment Board in
November 2007, and currently manages the
TSP Training and Agency Liaisonteam. Kevin is
a veteran of the United States Army. He holds a
Master of Science degree in family financial
planning from the University of Nebraska and a
Master of Arts degree in education from
Truman State University, and he has earned
the Retirement Plans Associate (RPA)
designation from the Wharton School of the
University of Pennsylvania. He is also a
Certified Financial Planner® and a member of
the Financial Planning Association and the
American Society of Pension Professionals and
Actuaries.

44. INVESTING IN THE TSP

45. Diversification
• Diversification means spreading money among different
investments to reduce risk
– AKA “Don’t put all your eggs in one basket”
• “Asset allocation” means spreading (allocating) your
investments among different kinds of financial assets to
achieve diversification
• Many investors seek to diversify both among asset classes
and within asset classes
Source: www.investor.gov

46. Asset Allocation
Stocks
Bonds

47. TSP Investment Menu
• Investments for stability
– Government Securities Investment (G) Fund
– Fixed Income Index Investment (F) Fund
• Investments for long-term growth
– Common Stock Index Investment (C) Fund
– Small-capitalization Stock Index Investment (S) Fund
– International Stock Index Investment (I) Fund
• Diversified investments
– Lifecycle Investment (L) Funds
• See tsp.gov/investmentfunds or the TSP leaflet, Fund
Information, for more information

49. Fixed income
(bond)
investments
Equity (stock)
investments

50. Rebalancing
• “Rebalancing” is bringing your portfolio back to your original
asset allocation mix by:
– Selling over-weighted asset categories
– Purchasing under-weighted asset categories
• Rebalancing provides a simple way to implement the ”Buy
low, sell high” principle, without having to time the market
• Rebalancing reduces the overall risk in a portfolio,
discourages emotional decisions and short-term thinking, and
enforces the discipline to “buy low – sell high,” BUT . . .
• It doesn’t always guarantee higher returns
Source: http://www.sec.gov/investor/pubs/assetallocation.htm

51. 30
20
6
4
40

52. 30
20
6
4
40

53. Time Horizon and Reallocation
• The most common reason for changing your asset allocation
is a change in your time horizon
• People investing for retirement often reduce their stock
holdings and increase their bond holdings as they get closer
to retirement age

54. THE TSP LIFECYCLE FUNDS

56. Target dates and the “Efficient Frontier”
G
74%
Investment in the L Funds does not protect from investment losses
Expected Risk HighLow
HighLowExpectedReturn

57. Which L Fund is right for me?
L Income L 2020 L 2030 L 2040 L 2050
Genny
b. 1990
Dexter
b. 1975
Bobbie
b. 1955

58. How do they work?
• Like their underlying investment funds, the TSP Lifecycle
Funds are passively managed
– They follow a pre-determined glide path
• Rebalanced – every business day to their target percentages
• Reallocated – every quarter to become more conservative
• Reviewed – annually by professional investment consultants

59. Reallocation in the L Funds
The L2050 Fund Glide Path
July 2010
(inception)
July 2020
July 2030
July 2040
July 2050
(landing)

60. Tell me more
• TSP investment style is both strategic and passive
• The TSP Lifecycle model combines “to” funds with a
“through” fund
– Numbered L Funds (e.g., L2050) are dynamic funds that follow a glide
path to their target date
– The L Income Fund is a static fund to last through retirement
• TSP investment funds are similar to, but aren’t literally,
mutual funds
– No “second layer” of fees

61. What will I pay?
1 Net cost to TSP participants, averaged across all funds
2 All-in, participant-weighted cost of large 401(k) plans. Source: Deloitte, Inside the Structure of Defined Contribution/401(k) Plan
Fees, 2013
3 Asset-weighted average expense ratio for equity mutual funds. Source: Investment Company Institute, 2014 Investment
Company Factbook
$0.29 per $1,000 1
$4.10 per $1,000 2 $7.40 per $1,000 3
TSP
401(k) Plans
Retail Mutual Funds

62. (Assumes 7% annual rate of return)
$377,530 (TSP - 0.029%)
$339,206 (401(k) - 0.41%)
$309,075 (Mutual Fund - 0.74%)
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Year 1 Year 5 Year 10 Year 15 Year 20 Year 25 Year 30
Pay Less to Invest!!

63. Why choose an L Fund?
• It’s simple
– Make one decision: When will you need your money?
– Each L Fund is actually a diversified portfolio; one fund is all you need
• It’s disciplined and low maintenance
– The L Funds are professionally designed and adjust automatically
• It’s cost effective
– No additional costs

64. Questions???

65. Evaluation and CEU Credit
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67. Personal Finance Virtual Learning Event
Encouraging Positive Financial Behaviors
Through Motivation, Counseling & Coaching
June 2-4, 11 a.m.-12:30 p.m. ET
• June 2:
Motivating Clients to Develop Positive Financial Behaviors, Dr.
Barbara O’Neill
• June 3:
Financial Therapy Insights for Financial Counseling and
Education, Dr. Mary Bell Carlson
• June 4: Step by Step Financial Coaching Techniques, Jerry
Buchko
Each webinar followed by a 1-hour Twitter chat with #MFLNchat
Learn more here: http://bit.ly/1wyltmW

68. Find all upcoming and recorded webinars
covering:
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Community Capacity Building