What are deadline funds and how do they work?

Target date funds are a popular investment vehicle for them Saving for retirement, and are an integral part of many 401(k) plans. They have some advantages, but also some disadvantages.

What is a key date fund?

A target date fund, or TDF, is a lifestyle fund invested toward a target retirement date. They are usually a collection of mutual funds from the fund company that offers the TDF. There are also some target date ETFs. The manager will allocate the underlying investment funds according to the time remaining to the target date.

The largest Target Date fund families include Vanguard, Fidelity, T. Rowe Price and the American Funds. These and other fund families offer a full range of target dates. For example, Vanguard offers TDFs with target dates from 2020 to 2065 in five-year increments.

Read: What happens to my 401(k)?

How do deadline funds work?

The fund manager allocates the underlying holdings in the fund according to the time remaining to the target date. The fund manager then reduces the equity allocation over time as the target date approaches. At some point around the target date, the equity allocation levels off and stays within the fund’s so-called glide path.

Benefits of Deadline Funds

Target date funds offer a fully managed, no-hassle investment option. Whether within a retirement plan like a 401(k) or elsewhere, target date funds offer investors an option that doesn’t require management on their part. In essence, term funds can provide a very inexpensive form of investment advice.

Target date funds offer built-in diversification. For retirement plan participants and other investors uncomfortable making their own investment decisions, target date funds offer instant diversification within a single fund.

Target date funds are often the default option in 401(k) plans that use auto-enrollment. Studies have shown that plans with an auto-enrollment feature have significantly higher overall participation rates than those that don’t. Deadline Funds can help facilitate the automated enrollment process for 401(k) sponsors.

Disadvantages of fixed date funds

Target funds do not prevent investors from losing money in a stock market downturn. This should be made clear in training for 401(k) participants and others. A look at the most recent returns for three timely target funds up to May 30, 2022 makes this clear:


Year-to-date return

1 year return

Avant-garde goal 2025



Faithful Freedom 2025



T Rowe Price retired 2025



These are funds that are conceivably aimed at investors who will retire in about three years. Note that during the 2008 financial crisis we also saw losses in short-dated target date funds. It is important for investors considering a target date fund to understand that the fund’s performance is a function of the allocation of the underlying funds and the performance of the financial markets. Nothing is guaranteed.

These are one-size-fits-all funds. They assume that every investor of a similar age has similar investment needs and a similar risk profile. Of course this is not the case.

Spending can get high in some target date families. Fund expenses can vary widely. In some families, the composite expense ratio is simply the proportionate expense ratio of the underlying funds. Such is the case with Vanguard’s Target-Date series of funds, with ultra-low expense ratios of 0.08% for each of these funds.

In other cases, a fund management fee may apply in addition to the accrued expenses of the underlying investment funds. Additionally, the funds that make up the Target Date Fund may have their own high expense ratios.

Points to note

  • Investors are free to invest in a fund with a target date of their choice. You are not limited to the fund whose target date is closest to your normal retirement date. This allows them to choose a fund that is either more or less aggressively invested based on their needs and risk tolerance.

  • Effective date funds are presented as retirement funds but can be used as an investment for any purpose an investor may have. They are typically available in taxable brokerage accounts as well as IRAs and workplace retirement accounts such as 401(k).

  • The fund’s target date glide path varies by target date fund family. Some funds enter glide path mode on or near the target date. These funds are “too” in terms of their glide path. Other deadline families enter their glide path at a later date, these funds are considered “through” retirement.

  • When using a target date fund in combination with other types of investments like other mutual funds, ETFs, or other investments, it’s important to make sure your overall asset allocation is appropriate for your situation.

Target date funds can serve as a one-stop investment option for retirement plan participants and other investors. As with any other investment, it is important to understand how the Target Date Fund invests your money. These funds offer a number of benefits, but like any other investment, they also involve risks.

https://www.marketwatch.com/story/what-are-target-date-funds-and-how-do-they-work-11654798024?rss=1&siteid=rss What are deadline funds and how do they work?

Brian Lowry

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