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Should you choose a target-date or target-risk fund in your 401(k)?

Should you choose a target-date or target-risk fund in your 401(k)?

February 17, 2022

Your 401(k) plan offers several investment options, including target-date funds (TDFs) and target-risk funds (TRFs). Although they may sound mysterious, they’re actually intended to make managing your investments easier by offering a one-fund option. Instead of having to pick other funds to create a portfolio yourself, the funds are managed to match your needs for retirement. Get to know the differences and how you might be able to consider one of these funds to help you save for retirement.

What’s a target-date fund?

Investments can be an intimidating topic. TDFs help simplify investing in your 401(k) by automating the process for you. The name of the fund includes a target year, so you choose a year that corresponds roughly with the time you’ll want to retire, and the fund manager invests in a way that's appropriate for your planned retirement year. The manager invests in higher-risk investments early in the fund’s life and reduces the risk as the expected retirement date approaches. 

TDFs are made up of stocks and bonds. The manager uses stocks primarily to seek growth, and bonds both to help mitigate the risk of stocks and to generate income within the fund. The blend of stocks and bonds changes over time. 

For example: If you’re in your mid-20s today, you might choose a 2065 TDF. (TDF dates typically come in five-year increments, such as 2060 and 2065). Your portfolio will typically consist mostly of stocks, often 80% to 90% or more, because you should have the time to benefit from the growth opportunities stocks typically offer and to recover from the inevitable downturns. The remainder is likely to be in bonds, which offer regular interest payments and the return of principal (except in cases of bankruptcy or related events). Over time, the blend of the fund’s investments will become more conservative. This gradual change in the fund’s investments is called a glide path.

A sample target-date fund glide path

Graph shows glide path of a TDF, investing more than 90% in equity 15-40 years form retirement, gradually being more conservative to 20%-30% equity 15 years into retirement

Allocations may vary as a result of market swings or cash allocations held during unusual market or economic conditions.

What’s a target-risk fund?

With a TRF, rather than choosing an approximate retirement date, you choose a fund that offers an investment mix that matches your desired level of risk. Think of TDFs as shooting an arrow a specific distance (the number of years to retirement) and TRFs as dialing the volume up or down for the desired growth. TRFs generally offer choices ranging from aggressive to conservative:

  • If you want higher levels of growth (through a larger allocation to stocks) and are willing to accept the greater downside potential, you may choose a more aggressive TRF. 
  • If you’re concerned about potential downturns and only seek modest growth potential, you may want a conservative TRF.
  • Or you may choose the middle ground—a balanced approach with a blend of approximately 60% stocks and 40% bonds.

Unlike with TDFs, the composition of TRFs doesn’t change methodically over time—which means more involvement from you. If you initially choose an aggressive TRF, for example, you must eventually decide about switching some or all of your investment into a more conservative fund (choosing among TRFs and other funds) as you get closer to retirement. 

How to decide between target-date and target-risk funds in a 401(k)

If you don’t want to have to manage the risk in your 401(k) investments yourself, then a TDF may be right for you. But if you know you want a certain level of risk throughout your career or at least until you change your mind, then a TRF may suit you better.

How to choose a TDF

Let’s say you want a TDF—then the main decision you need to make is the fund’s year. It may sound simple, but make sure you choose a year as close to your intended retirement as possible, so that the fund matches your need for growth early and conservative choices later. 

Once you’ve decided on a year, choose the manager. Look up the fund’s historical performance, the length of time the fund management team has worked together, and the cost. Your 401(k) provider will offer you this information or you can go to a public website and type in the fund name for more information. 

How to choose a TRF

If you don’t want to pick a specific retirement date but do want the convenience of a single fund targeting a certain amount of risk, you’ll probably lean toward a TRF. Remember, an aggressive fund is likely to outperform a conservative one over time, but it'll also be more vulnerable to sharp declines. When you do your research, consider choosing a management team that has performed well together through up and down markets.  

TDFs and TRFs help you keep 401(k) investing simple

You’re busy and you’re not an investment expert, but you want your retirement funds to be in good hands. Consider TDFs and TRFs, which give you a choice of investment styles and the ability to choose just one fund that’s professionally managed. The most important thing you can do is stick with your plan, letting your money work for you while you’re at work. 


For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges and expenses before investing. The prospectus contains this and other important information about the investment option and investment company.  Please read the prospectus carefully before you invest or send money. Prospectus may only be available in English. 

There is no guarantee that any investment strategy will achieve its objectives.

Asset allocation does not guarantee a profit or protect against a loss. Asset allocation may not be appropriate for all participants, particularly those interested in directing their own investments.
The portfolio’s risks are directly related to the risks of the underlying funds, as described. Please see the fund fact sheet and prospectus for more details on the risks.

It's your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel.

The target date is the expected year in which investors in a target-date portfolio plan to retire and no longer make contributions. The investment strategy of these portfolios is designed to become more conservative over time as the target date approaches (or, if applicable, passes) the target retirement date. Investors should examine the asset allocation of the portfolio to ensure it is consistent with their own risk tolerance. The principal value of your investment, as well as your potential rate of return, is not guaranteed at any time, including at, or after, the target retirement date.

A target-risk portfolio is a fund of funds that invests in a number of underlying funds ranging from conservative to aggressive. The investment strategy of these portfolios is designed to maintain a consistent level of risk over time regardless of the market environment. Each target-risk portfolio is diversified across a mix of stocks, bonds, and other capital preserving investments, and while this may reduce the overall portfolio risk and volatility, diversification does not guarantee a profit or eliminate the risk of a loss. The portfolio is subject to the same risks as the underlying funds in which it invests. There can be no assurance that either the portfolio or the underlying funds will achieve their investment objectives.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

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