What are target-risk funds?

Target-risk funds, also known as asset allocation funds, are ready-made funds that align with your risk tolerance. Target-risk funds let you invest based on the level of risk you’re comfortable with. They’re intended to make managing your investments easier by offering a one-fund option. Understand how you could use target-risk funds to help you save for retirement.

Risk vs. reward 

Group retirement plans normally offer a variety of investments to suit different types of investors. Target-risk funds require you to decide what type of investor you are and how much risk you’re willing to take. You decide the amount of risk and potential return you’re comfortable with, then choose a fund based on its risk strategy.

Some investment types come with low risk and a relatively low potential reward, like bonds and fixed-income investments, and other investment types come with more risk and more potential reward, like stocks. 

Consider when you want to have access to your money. Your age, life stage, and time horizon to retirement are important factors to consider when investing.

Ready to invest in your retirement?  

Having a mix of investments can help you balance your risk and potential reward as you save for your retirement. Your group retirement program likely has investment options for all risk categories. 

Different funds for different risk levels

Knowing your financial goals and your comfort with risk can help you pick the best target-risk fund for you. 

Your comfort with risk Your investor strategy
Risk's not for you. Protecting your money is what matters most. Maybe you're close to taking it out, or just feeling cautious. Conservative
Risk makes you nervous. Protecting your money matters a lot, but you want it to grow just a little more before you need it. Moderate
You can handle a little risk. You want your money to grow, but protecting it is important too. Balanced
You're okay with risk. You want your money to grow, and you've got time to wait. Growth
Risk doesn't worry you. Growing your money is what matters most, and you’ve got plenty of time before you need it. Aggressive

Target-risk funds generally offer choices ranging from conservative to aggressive:

  • If you’re concerned about potential downturns and only seek modest growth potential, you may want a conservative target-risk fund.
  • 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 target-risk fund. 
  • Or you may choose the middle ground—a balanced approach with a blend of approximately 60% stocks and 40% fixed income.

Remember, though, that in a target-risk fund, the risk level doesn’t change over time even if your personal comfort with risk does.  

What’s the difference between target-risk funds and target-date funds?

A target-date fund, sometimes called a retirement date fund, is a single fund that’s made up of a variety of other funds. The mix of funds is designed and managed by investment experts focused on maximizing the amount of money you have in the fund on the date you retire. 

With a target-risk fund, 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 target-date funds as shooting an arrow a specific distance (the number of years to retirement) and target-risk funds as dialing the volume up or down for the desired growth. 

Unlike with target-date funds, the composition of target-risk funds doesn’t change methodically over time—which means more involvement from you. If you initially choose an aggressive target-risk fund, for example, you may decide to switch some or all of your investment into a more conservative fund as you get closer to retirement. 

Don’t set it and forget it

Even if you choose a ready-made investment strategy, like a target-risk fund, it’s still important to review your investments on a regular basis to be sure they’re performing well and aligned with how you feel about risk. Each portfolio is designed for a specific risk tolerance and return objective. You should check back from time to time to be sure the risk and investment strategy are still in line with your goals.

As your personal situation changes, you can update your investor profile and reevaluate if you have the right mix of risk and reward for your future. You could consider a different target-risk fund as your circumstances change or as you get older. A financial advisor can help you look at your portfolio and adjust it. 

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.