All-in-One Funds: Targeting Time or Risk?

Investing can seem complicated, which is why many investors place all or a large portion of their assets in a single fund that is intended to offer a balanced portfolio. Although all-in-one funds can be helpful to save for retirement, they are not as simple as they appear. As with any investment, it’s important to understand the fund’s objectives and how it fits into your overall financial picture.

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There are two common types of all-in-one funds: target-date funds and lifestyle funds. Both of these are typically “funds of funds,” meaning they hold a professionally managed mix of equity and bond funds that provide diversification based on their own objectives.

Target-Date Funds

Target-date funds are offered by about 80% of large employer-sponsored retirement plans, often as the default option. For this reason, these funds are commonly held by young investors, but many older people hold them as well. At the end of 2016 (most recent data available), 401(k) participants in their sixties had almost 20% of their plan assets invested in target-date funds.1

As suggested by the name, a target-date fund’s mix of assets is selected for a specific time horizon. The target date, usually included in the fund’s name, is the approximate date when an investor would withdraw money for retirement or another purpose, such as paying for college. An investor expecting to retire in 2035, for example, might choose a 2035 fund. As the target date approaches, the fund typically shifts toward a more conservative asset allocation to help conserve the value it may have accumulated. This transition is driven by a formula called the glide path, which determines how the asset mix will change over time.

The glide path may end at the target date (a “to” fund) or continue to shift assets beyond the target date (a “through” fund). A through fund will hold a larger percentage of equities longer into retirement — typically 10 to 20 years — to guard against the risk of running out of money during a long retirement. However, this creates more short-term risk in a down market. During the Q1 2020 market collapse, target-date funds with a “to 2020” glide path lost 8.4%, while those with a “through 2020” glide path lost 10.6% because they contained a higher equity allocation. On the other hand, these “through” funds did better in the long bull market running up to the 2020 bear market.2

Funds with the same target date may vary not only in their glide path but also in the underlying asset allocation, investment holdings, turnover rate, fees, and fund performance. Variation tends to be greater as funds near their target date. If you own a target-date fund and are nearing the target date, be sure you understand the asset mix and whether the glide path extends beyond the target date.


Target on Top

Over the last 20 years, target-date funds have surpassed lifestyle funds as the most popular all-in-one fund due to their wide availability in workplace retirement plans. At the end of 2019, investors held almost $1.4 trillion in target-date funds and about $382 billion in lifestyle funds.


Source: Investment Company Institute, 2020


Lifestyle Funds

Lifestyle funds, also called target-risk funds, include a mix of assets designed to maintain a consistent level of risk. These funds may be labeled with terms such as conservative, moderate, or aggressive. Because the targeted risk level remains consistent over time, you might want to shift assets from one lifestyle fund to another as you approach retirement or retire. More conservative investments may be more appropriate during retirement.

The Big Picture

In theory, all-in-one funds are meant to be an investor’s only holding. However, many people own other investments as well. For example, you may own a target-date fund in your 401(k) and other investments in your IRA. In this case, it’s important to look at the asset allocation and diversification of your portfolio as a whole. Asset allocation and diversification are widely accepted methods to help manage investment risk; they do not guarantee a profit or protect against investment loss.

The principal value of a target-date fund is not guaranteed before, on, or after the target date. There is no guarantee that you will be prepared for retirement on the target date or that any fund will meet its stated goals. The return and principal value of all funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Bond funds are subject to the interest rate, inflation, and credit risks associated with the underlying bonds in the fund. As interest rates rise, bond prices typically fall.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

UW Credit Union
3750 University Ave. Madison, WI 53705
Phone: 608-232-5000 or 800-533-6773, ext. 2468