A higher level of interest in target-date funds springs from the market meltdown of 2008 and 2009, when participants in TDFs that were nearing the target date experienced losses that were far beyond expectations. Unfortunately, participants in these near-year TDFs didn’t think that they were taking on as much risk as they were. This misperception arose from a lack of understanding about the funds’ glide paths.
The term “glide path” is used to describe a TDF’s risk profile. It refers to the percentage split between equity and fixed income investments in the TDF and how that split changes as the years go by. This change is best illustrated visually, using a graph to plot the equity percentage of the fund at various points in time. The expected result is a sloping curve, higher in the far-off years, like 2055, due to the higher equity percentage in the fund in those years, and lower in the near years, like 2015, as a result of the decreased equity percentage. Many investors in TDFs assumed that the equity percentage in the near-year funds would be quite low. However, that may not have been the case for anyone who invested in a “through” target-date series rather than a “to” target-date series.
