Glide Paths To Versus Through Retirement

Two target date funds labeled with the same year can hold noticeably different amounts of stock. The difference comes from a design decision made by the sponsor, not by the saver.

What a glide path is

A glide path is the schedule by which a fund reduces its equity exposure as the target year approaches. It is set in advance and applied mechanically.

The fund does not react to markets or to the individual. It moves along the schedule regardless of what has happened to prices or to the saver's circumstances.

Every target date fund publishes its glide path, usually as a chart in the prospectus showing the intended mix at each age.

The to and through distinction

A fund designed to the retirement date reaches its most conservative allocation at the target year and stops there.

A fund designed through the date keeps reducing equity for years or decades after the target year, on the reasoning that the money is spent gradually rather than all at once.

The consequence is that a through fund typically holds more stock at the target year than a to fund with the identical label.

The assumption behind each design

The to approach assumes the saver may move the money at retirement, perhaps into an annuity or a different arrangement, and should therefore arrive with lower exposure.

The through approach assumes the money stays invested and must last for a long retirement, which argues for keeping growth exposure past the date.

Neither assumption is right in general. Each fits a different set of circumstances, and the label on the fund does not reveal which one it was built for.

Why the difference is easy to miss

Employer plans typically offer one target date family, and the year is chosen by matching the expected retirement date. The glide path arrives as a default.

Automatic enrollment often places contributions in the age-appropriate fund without the participant examining the design at all.

The mix only becomes visible when someone reads the fund's holdings, and the number that matters is the equity share at and shortly after the target year.

What else varies between families

Beyond the glide path, families differ in whether the underlying funds are index or active, how much international exposure they carry, and whether inflation-linked bonds are included.

Costs differ as well, since a fund of funds carries both the wrapper's fee and the underlying funds' expenses in its stated total.

Comparing two families means comparing those elements rather than the year on the label, which is the only thing they are guaranteed to share.