Target date funds are mutual funds that change allocation automatically based on your target (goal) date
Why It’s Important
Target date funds are a great option for those that do not want to be involved with picking different mutual funds, stocks, and bonds to get the allocation appropriate for their situation. Think of funds as big baskets. In those baskets, there are other little baskets of stocks. So, you become diversified by holding just one target-date fund. They also typically have low expense ratios.
You may be saying well this seems like a no-brainer. Why doesn’t everyone just pick target-date funds and invest? Well, not so fast! Target date funds assume that every one that is going to retire in a certain year have the same situation. What if you have a different situation than the average? That doesn’t make a difference to the fund managers that are making the determination on what to invest in. I started with target-date funds when I first started investing but as I learned more, I started picking my own funds to get my desired allocation. It is a good place to start! Honestly, if you never picked what to invest in your 401(k), chances are you are in a target-date fund.