How Target-Date Funds Work
A target-date fund (TDF) is a mutual fund that automatically adjusts its asset allocation toward a predetermined target year (the target date). For example, a "2050 Target" fund currently maintains a high equity allocation of 80-90%, gradually increasing the bond allocation as 2050 approaches. This shift in asset allocation is called the "glide path."
Investors simply choose a fund with a target date close to their expected retirement year, and the optimal asset allocation for their age is automatically maintained. Rebalancing is also performed automatically, making it possible for people with limited investment knowledge to achieve rational portfolio management.
A Concrete Glide Path Example
Let's look at a typical glide path for a 2050 target fund. In 2025 (25 years to retirement): 85% equities, 15% bonds. In 2035 (15 years to retirement): 70% equities, 30% bonds. In 2045 (5 years to retirement): 50% equities, 50% bonds. In 2050 (at retirement): 35% equities, 65% bonds. After retirement, the equity allocation continues to decrease, eventually settling at around 20% equities and 80% bonds.
The philosophy behind this glide path is to take on more risk for higher returns while young, and gradually reduce risk to protect assets as retirement approaches. Even if a crash occurs just before retirement, the impact is limited because the equity allocation is already low.
Advantages and Disadvantages
The greatest advantage is achieving rational portfolio management on autopilot. The fund handles all asset allocation decisions, rebalancing, and age-based adjustments automatically. TDFs are popular as iDeCo (Japan's individual-type defined contribution pension) investment options and are ideal for people who do not want to spend time on investing.
The disadvantage is that expense ratios tend to be higher than standalone index funds. TDF expense ratios are typically 0.2-0.5% per year, several times higher than global equity index funds (0.05-0.1% per year). Additionally, the glide path may not match your personal risk tolerance. Investors with sufficient knowledge can achieve better cost efficiency by combining index funds themselves. Guides on choosing mutual funds teach you how to read fund reports and what to look for when comparing funds.
Comparison with Managing Asset Allocation Yourself
Compared to combining global equity and bond index funds yourself and rebalancing once a year, the cost difference with a TDF amounts to several hundred thousand yen over 30 years. Contributing 3 man-yen per month for 30 years, a 0.1% expense ratio yields approximately 2,497 man-yen while a 0.4% expense ratio yields approximately 2,350 man-yen, a difference of about 147 man-yen.
Whether you can accept this difference as a "convenience fee" is the deciding factor. For people who have no interest in investing and want to minimize effort, a TDF is a rational choice. On the other hand, if you can handle annual rebalancing yourself, combining low-cost index funds is more advantageous. Introductory books on asset allocation provide a systematic framework for thinking about allocation based on age and risk tolerance.
Next Steps - Consider a TDF
When selecting investment options for your iDeCo account, consider adding a TDF to your candidates. Simply choose a fund with a target date close to your expected retirement year, and optimal management is handled automatically from there. Weigh the expense ratio against the effort of managing your portfolio yourself.
Try our simulator to check the results of regular contributions at a TDF's assumed return rate (4-6% per year). While a TDF's return is lower than 100% equities, the stability of your assets at retirement is enhanced.