Putting the objective into action

Consider our 45-year old participant. At 25, she had little invested in her 401(k) and had many years ahead of her to absorb market volatility. At 65, she will have accumulated the bulk of her savings and will soon begin to draw on her savings for income. Your target date fund has to meet your vision for her at every stage of her career.

Selecting the glidepath

The glidepath maps the mix of asset classes that will bring her from the start of her career into retirement.

Key questions to consider:

  • How high should the equity percentage be at the beginning, and how low should it be at the landing point?
  • At what rate should fixed income and inflation-fighting asset classes replace equities as the fund ages to maturity?
  • How will your glidepath help participants turn their accumulated savings into food, shelter and living expenses in retirement?

Your glidepath needs to achieve your fund objective and shapes your participants' experience along the way.

Same Target Year, Different Glidepaths

Bottom Line:

The three key decisions in building the glidepath are the equity percentage for the longest-dated funds, the final equity landing point, and the rate at which the equity percentage declines. The glidepath also needs to take into consideration participants' need for future growth and tolerance for volatility during retirement. The target date in the name of the fund is the approximate date an investor plans to start withdrawing money.

Action Step:

Work with your fund provider to understand how the glidepath sets out to achieve your plan's objective and what your participants can expect at each stage of their careers.

Print & Go Resource

Thumbnail: Target Date Funds: The Essential Guide

Target Date Funds:
The Essential Guide

Investing involves risk, including possible loss of principal.

The target date at the end of the name designates an approximate year in which an investor plans to start withdrawing money. The blend of investments in each portfolio is usually determined by an asset allocation process that seeks to maximize assets based on an investor's investment time horizon and tolerance for risk. Typically, the strategic asset mix in each portfolio systematically rebalances at varying intervals and becomes more conservative (less equity exposure) overtime as investors move closer to the target date. The principal value of the funds is not guaranteed at any time including the target date.