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When considering investments for your 401(k), you might see options listed as “target-date” or “lifecycle” funds. These are actually the same type of fund. They’re structured to minimize risk and maximize returns at a specific date.

Target-date or lifecycle funds automate some aspects of portfolio management, and are ideal for investors who don’t want to actively manage their portfolio. So they’re a popular option for 401(k) accounts. There are some downsides to these funds, however.

In this article we’ll take you through the pros and cons of target-date or lifecycle funds. That way, you can better choose investments for your 401(k) portfolio.

  • Target-date funds and lifecycle funds are the same type of fund. 
  • Target-date and lifecycle funds are designed to optimize your returns and minimize your risk by a target date. 
  • As the target date approaches, target-date, and lifecycle funds gradually make your portfolio more conservative.
  • Many 401(k) investors favor target-date, and lifecycle funds because they don’t require ongoing research and maintenance.
  • However, these funds are relatively inflexible, and can come with high management fees.

Understanding Target-Date Funds and Lifecycle Funds

The wide range of options available in the average 401(k) can be confusing. The terminology used to describe these investments can add to the confusion. For example, “target-date,” “lifecycle,” and “age-based” funds are all terms used to describe the same type of fund.

The concept behind these funds is simple. First, you pick a fund that targets the date you want to retire, such as 2050. Then, you put money into it. The fund will be managed according to some version of modern portfolio theory so that, at least in principle, the fund maximizes returns and minimizes risk until the target date. These funds are, in other words, a kind of “auto-pilot” for your retirement investments as they remove the need for you to research and manage the investments.

In practice, target-date and lifecycle funds gradually get more conservative as their target date approaches.

If, for example, you invest in a life-cycle fund with a target retirement date of 2050, the fund will initially be aggressive. In 2025, the fund might hold 80% stocks and 20% bonds, but each year there will be more bonds and fewer stocks in the fund. By 2035, you will be halfway to the target date, so the fund might be 60% stocks and 40% bonds by then. Finally, the fund may reach 40% stocks and 60% bonds by the target retirement date of 2050.

Target-date and lifecycle funds also carry inherent risk of stock market investing. It could be that a bull market will start and end just in time to keep the fund competitive at the target date. Or, a bear market could decimate the fund’s holdings just a few months before the target date.

Using Target-Date and Lifecycle Funds

Many investors are drawn to target-date or lifecycle funds because they automate much of the work of portfolio management. Instead of spending hours researching investment options, you can put a target-date fund in your 401(k) and – in theory – watch it grow until you retire. This “auto-pilot” feature is the major advantage of target-date funds.

Just as with any investment, however, there are some drawbacks to consider. The automated changing of the portfolio assets may not suit your investing goals. For example, you may want to invest differently if you plan to retire before the target date on the fund or if want to keep working after that date.

Furthermore, compared to other investments, target-date funds can be expensive. They are technically a fund of funds (FoF)—a fund that invests in other mutual funds or exchange-traded funds—which means you have to pay the expense ratios of those underlying assets, as well as the fees of the target-date fund. 

Target-date funds can also potentially complicate your asset allocation if you hold other assets. These funds are designed to maintain an optimum asset allocation across the life of the fund, and investing in other assets alongside this could upset this fine balance. Some investment professionals advise against investing in other assets if you hold target-date funds.

What’s the Difference Between Target-Date Funds and Lifecycle Funds?

Target-date fund and lifecycle funds are the same thing. They are both a type of fund that is optimized to generate returns and lower risk through a particular date.

Are Target-Date or Lifecycle Funds a Good 401(k) Investment?

It whether target-date funds are ideal for you will depend on your investment style, level of knowledge, and ability to manage your own investments. These funds automate portfolio management for you, at the cost of inflexibility and potentially higher fees.

Are Target-Date or Lifecycle Funds Low Risk?

Target-date or lifecycle funds can be considered low risk, but the risk varies by fund. Any investment in the stock market comes with some risk. There is no guarantee that the funds will provide high returns by their target date.

The Bottom Line

Target-date funds and lifecycle funds are a type of fund designed to optimize your returns and minimize your risk through a particular date. These funds are a popular choice for 401(k) investors because they don’t require ongoing management. However, they are relatively inflexible and can come with high management fees.

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