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

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    Muscatine Living

    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.

    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.1

    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.

    1) Morningstar, May 12, 2020

    © 2021 Broadridge Financial Solutions, Inc.

    Provided by Jakob Bower, Written by Broadridge

    The material provided does not necessarily reflect the views or opinions of Principal Financial Group®. Broadridge is not affiliated with any company of Principal Financial Group®.
    Principal Financial Group® does not endorse the commentary, opinions or views of the content.

    This material should be considered general information and should not be used as the primary basis for a financial decision.

    It is provided with the understanding that the member companies of the Principal Financial Group® are not rendering legal, accounting, or tax advice.

    Insurance products issued by Principal National Life Insurance Co. (except in NY), Principal Life Insurance Co., and the companies available through the Preferred Product Network, Inc. Securities and advisory products offered through Principal Securities, Inc., 888-774-6267, member SIPC. Principal National, Principal Life, the Preferred Product Network, and Principal Securities, Inc. are members of the Principal Financial Group®, Des Moines, IA 50392. Jakob Bower, Principal National and Principal Life Financial Representative, Principal Securities Registered Representative, Financial Advisor. Retirement Resource Group is not an affiliate of any company of the Principal Financial Group®.

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