What’s the difference between Target Date Funds and Target Allocation Funds? And should I ever use a Target Date Fund with a different year?

TDF’s and TAF’s are pre-built, diversified portfolios (including an array of asset classes/investment types) that do much of the investment work for you. TDF’s automatically adjust the stock/bond mix as you get older, whereas TAF’s stock/bond mix only changes when you decide to (e.g. at different life stages). TDF’s and TAF’s can come in the form of custom-built portfolios, or off-the-shelf mutual funds. Individual asset class mutual funds focus on a single type of investment (e.g. just US Large Company Stocks, US Bonds, or International Stocks) and are therefore much less diversified than TDF’s and TAF’s. Mutual funds are investment vehicles/companies that hold multiple securities (e.g. stocks and/or bonds) and sell shares of those mutual funds so that investors don’t have to figure out how to buy individual stocks and/or bonds, etc.

WealthStep 401k programs utilize custom TDF’s or TAF’s and WealthStep Direct utilizes create custom TAF’s. Custom portfolios allow for best-of-breed investment selection, greater diversification and often lower cost. If you like the idea of TDF’s in WealthStep Direct, let us know and we’ll explore adding that as an option.

If you use TDF’s but feel that the stock/bond mix for the fund that corresponds with your planned retirement date does not have a high (or low) enough percentage in stocks, you always have the option to use a later-dated (or earlier-dated) fund. However, be careful not to over- or under- estimate your risk tolerance, especially as you approach or enter your retirement years, when people’s ability to handle market fluctuations often decreases, and there is less time or no time for your money to recover from market declines.