Target-Date Fund (TDF)

A Target-Date Fund (TDF) refers to a type of investment fund commonly offered in employer-sponsored 401(k) plans, designed to simplify retirement savings for participants. Also known as a "Lifecycle Fund" or "Target-Retirement Fund," a TDF is a professionally managed, diversified investment portfolio with an asset allocation strategy that automatically adjusts over time based on the target retirement date of the investor.

The primary objective of a Target-Date Fund is to provide employees with a hands-off approach to retirement investing, tailoring the asset allocation to become more conservative as the target retirement date approaches. This means that younger investors with longer investment horizons will have a higher proportion of equities, which tend to carry higher risk but offer greater growth potential. As employees age and approach retirement, the fund will gradually shift towards a higher allocation of fixed-income assets, such as bonds, to provide more stability and reduced volatility.

Example 1: Suppose an employee plans to retire in 2055. They would select a Target-Date Fund labeled as "2055 Fund" or something similar, which automatically adjusts its asset allocation over time to align with the individual's retirement year.

Example 2: Another employee planning to retire in 2040 would opt for a "2040 Fund." This fund will have a different asset allocation, with a greater emphasis on growth assets since they have a longer investment horizon compared to the first example.

Example 3: A seasoned employee closer to retirement, with a target retirement date of 2023, would select a "2023 Fund" that consists primarily of fixed-income investments to protect their accumulated savings and minimize exposure to market fluctuations as they approach retirement.

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