With their rapid asset growth over the last decade, the investment strategies known as target-date funds (TDFs) are now woven into the everyday vernacular of the financial press and numerous industry pundits. Quite often, when journalists attempt to describe a TDF’s philosophy in the most simplest of terms, you’ll hear them insert a well-known marketing slogan—one from a 1990s infomercial for rotisserie ovens.Rotiseree_12172015

Of course, I’m talking about the indelible phrase, “set it and forget it.” Frankly, if you only had five words to describe the value proposition of a TDF, this isn’t a horrible place to start. However, this overplayed and oversimplified sound bite—particularly the “forget it” part—potentially fuels the common misperception that many investors in TDF strategies are disengaged, disinterested, and generally unaware of what they’re invested in.

At Vanguard we partnered with Greenwich Associates to better understand how well individual investors truly understand the risks and objectives of their TDFs. We also sought to achieve a greater sense of investor expectations around how TDFs will contribute to their spending needs in retirement. The survey included responses from more than 1,600 individual TDF investors using strategies available throughout the industry—not just Vanguard Target Retirement Funds. Our findings, which we summarized in a series of recently published investor insights articles offer an intriguing glimpse into the mind of typical TDF investors. Those of us involved in the project were left with a greater degree of confidence in the investing public’s understanding of these investment strategies.

Our survey led us to three key conclusions:

  1. The majority of TDF investors have a healthy understanding of the basic features and objectives of target-date funds.
  2. Most TDF investors appreciate that target-date investing comes with investment risk and that the overall level of risk of a TDF automatically declines as investors approach and enter retirement.
  3. The preponderance of TDF holders plan to withdraw funds from their TDFs and other tax-deferred assets at a gradual pace in retirement. Far fewer investors anticipate taking large withdrawals to purchase an annuity or otherwise disinvest from the markets all together.

These findings should offer reassurances for defined contribution plan sponsors, consultants, and investment managers who, in recent years, have been devoting more resources to participant outreach and education, particularly on the basics of TDF investing. However, with any survey of the general investing public, we continue to observe pockets of fundamental misunderstanding around a variety of investment products. In the case of TDFs, the greatest opportunities for improving investor acumen include dispelling the misperception that traditional TDFs provide guaranteed retirement income and reminding investors that these strategies continue to hold equity market risks throughout the retirement years—albeit in measured and carefully calibrated doses.

While deep investment acumen is not a universal characteristic for TDF investors (nor will it ever be), the beauty of these strategies resides in the fact that investment outcomes are universal—by design. The two graphics below show us how. In the illustration below, we display the risk-return outcomes of 1,000 randomly selected, self-directed 401(k) participants over the last five years—reflecting those individuals that forgo the use of a TDF and opt instead to “go it alone” in constructing a retirement portfolio. As you can see, the prevalence of extreme asset allocations causes the dispersion of outcomes to be significant and in many cases fails to follow a logical relationship between investment risk and return.

Self-directed investors


Note: Includes 1,000 random samples of participant accounts drawn from respective samples. Excludes ½% top and ½% bottom outliers for both risk and return, for a net sample of 980 observations. Source: Vanguard, 2015.

This compares with a much cleaner and more balanced depiction of risk-return outcomes for 1,000 randomly selected individuals invested entirely in TDFs, shown below. While the graphic displays roughly a dozen individual data points, behind each one of these dots are hundreds of individual investors with the same exact outcomes.

Single target-date investors


Note: Includes 1,000 random samples of participant accounts drawn from respective samples. Excludes ½% top and ½% bottom outliers for both risk and return, for a net sample of 980 observations. Source: Vanguard, 2015.

Together, these two graphics remind us why TDFs exist in the first place and demonstrate just how effective the strategies have been in positioning investors for investment and retirement success.

Finally, I should mention that while I picked on the often-quoted “set it and forget it” TDF tagline for potentially diminishing the investment acumen of those who entrust their life savings to these strategies, there is perhaps one positive twist to this popular TDF sound bite. It’s a concept that has been a hallmark of Vanguard’s philosophy since the beginning: Keep an eye on the long term, “forget” or tune out the endless streams of short-term noise that this industry and our capital markets so often generate, and focus on those things that can be controlled—particularly investment costs, and in the case of many TDF investors, ensuring your savings rate is adequate to provide for the retirement you require.


  • Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.
  • All investing is subject to risk, including the possible loss of the money you invest.