If you contribute to a target date fund in your 401(k) plan, you probably have a sense of how it works. The fund’s balance between stocks and bonds automatically shifts as you age, with less weight on equities as you get close to retirement.
But it’s important to read the fine print on these funds, because their allocations aren’t all alike on the “target date” – the day you retire. Some firms that manage target date funds (TDFs) adhere to a “to” glide path – meaning the funds reach their most conservative allocation on the target date. But the industry’s biggest players use a “through” glide path, meaning that the most conservative position is reached sometime well after retirement.
The difference is important. The “to” glide path provides greater protection against losses in a market downturn, but the “through” glide path boosts the odds of stretching your nest egg longer into retirement. Understanding that difference will matter to a growing number of retirees in the years ahead. The popularity of TDFs is soaring, with $618 billion invested at the end of 2013, according to the Investment Company Institute – up from $160 billion in 2008.
Glide path design is a topic of ongoing debate in the fund industry. The latest flareup came when BlackRock, the giant asset management firm and a key proponent of “to” glide paths, published a paper earlier this month making the case for its approach. The three investment managers that dominate the target date market, as measured by assets, all favor a “through” approach: Fidelity Investments, Vanguard and T. Rowe Price.