Preserving AUM for Outdated Target Date Funds

When the target date fund was invented in the 1990s, it was focused entirely on getting people to their retirement age. Now that Baby Boomers and Gen Xers are retiring to the tune of 4 million strong each year, the investment management industry now needs to focus on getting investors through their retirement years. 

Every five years, target date funds reach their target dates, which means that they become outdated. It also implies that investors who own these target date funds have reached their retirement age. This means that income becomes the primary investment objective of these investors, not capital appreciation.

The Problem: Bleeding AUM

The problem is that once the investor retires, they now need income to support their lifestyle at retirement, and target date funds are not designed to generate income. As a result, investors look for alternatives for income and eventually sell out of their target date funds. This happens every five years. 

This has led to an exodus of assets from outdated target date funds. Even though historical data on assets under management (AUM) for outdated target date funds are difficult to determine, the latest AUM data for 2025, 2020, 2015 and 2010 show declining balances. 

If we take a look at the assets held in target date funds that are outdated, you will see a pattern of declining assets. The older the target date fund, the lower the assets under management. This is exemplified by looking at the AUM across three of the largest issuers of target date funds, Vanguard, American Funds and BlackRock:

Vanguard Target Retirement 2025 Fund (VTTVX): $76.9 Billion

Vanguard Target Retirement 2020 Fund (VTWNX): $35.2 Billion

American Funds 2025 Target Date Retirement Income Fund (AAADX): $32.56 Billion

American Funds 2020 Target Date Retirement Income Fund (AACTX): $14.98 Billion

American Funds 2015 Target Date Retirement Income Fund (AABTX): $4.72 Billion

American Funds 2010 Target Date Retirement Income Fund (AAATX): $3.91 Billion

BlackRock LifePath Index 2025 Fund (LIBKX): $6.68 Billion

BlackRock LifePath Index 2020 Fund (LIMKX): $4.73 Billion

In theory, the declining balances are evidence that investors are selling these funds, especially after the target date is reached. One could extrapolate that investors are redeeming their target date funds for other alternatives that generate income for their retirement needs. The impact is that mutual fund and ETF companies are losing AUM and revenue every five years.

Current Options: Retirement Income Funds

To address investors’ need for income, mutual fund and ETF companies have changed the names or converted their outdated target date funds to include terms like “retirement income” to infer a shift in investment objectives during retirement. 

For example, in 2022 Vanguard, the largest issuer of target date funds, converted or merged one its outdated target date funds, Vanguard Target Retirement 2015 Fund (VTXVX) into “Vanguard Target Retirement Income Fund (VTINX)”. According to Vanguard, VTINX is “one of a series of Vanguard funds that use a targeted maturity approach as a simplified way to meet investors’ different objectives, time horizons, and changing risk tolerances.” 

As of the end of February 2026, the fund was composed of 68% bonds and 31% stocks. Vanguard claims, “This fund’s allocation to stocks and bonds is the allocation that all Target Retirement Funds are expected to assume within seven years after their designated retirement dates… In general, such funds are appropriate for investors with medium-term investment horizons (4 to 10 years).”

The issue with VTINX is that it is using a “targeted maturity approach” instead of targeting a specific income distribution yield. This primarily speaks to its bond holdings–its largest asset class at 68%. In addition, the time horizon for the fund is 4-10 years, which is too short for retirees who are looking at the possibility of 20-30 years in retirement. As a result, the time horizon of the fund does not match retirees’ investment time frame.

Lastly, the fund’s current yield is 3.25%. For retirees needing an income distribution rate of 3.25% or less, this fund meets their needs. But what about retirees that need 4% or 5% income from their retirement investments? Having one retirement income fund is insufficient as a product offering from an institution that is the largest issuer of target date funds.

Looking at how other institutions address outdated target date funds, we will look at American Funds, which is commonly used by financial advisors, and is one of the largest active investment managers. 

American Funds has three retirement income funds: 

• Retirement Income Portfolio- Conservative (NAARX)

• Retirement Income Portfolio- Moderate (NBARX)

• Retirement Income Portfolio- Enhanced (NDARX)

The three funds are designed for retirees who need income, but are differentiated based on risk tolerance. 

Fund	Yield	% Stocks	% Bonds
Retirement Income Portfolio- Conservative	2.79%	55%	39.5%
Retirement Income Portfolio- Moderate	2.46%	52.8%	41.6%
Retirement Income Portfolio- Enhanced	2.14%	63.9%	31.2%

Source: American Funds

The assumption and design of the three funds is that the more conservative the fund, the lower the downside risk (in the form of volatility) and the lower the income generated. While the more aggressive the fund, the higher the volatility and income generated.

What is interesting is that the most aggressive fund, American Funds® Retirement Income Portfolio — Enhanced (NDARX), has the lowest yield among the three funds. This seems counter to its stated description, “this portfolio is designed for retirees who seek a potentially higher level of income.”

When seeking both higher levels of income and growth, It is important to understand that there is an inverse correlation between yield (income) and capital appreciation (growth). In our previous article, The Fear of Relying on Yield for Income, we address the relationship between income and growth. In general, the more potential for capital appreciation of an investment, the lower the yield is of that investment, and vice versa. As a result, when constructing a portfolio using dividends for income, it is important to understand the relationship between capital appreciation and yield. 

Interestingly, American Funds uses the metric, “distribution rates”, to more accurately report the income generated by the portfolio. For purposes of comparing apples to apples across different fund families, we continue to use the 30-day SEC yield.

Once again, like Vanguard, all three American Funds portfolios only generate yield between 2-3%, which doesn’t address the need of retirees who need income or yield above 3%, which is not an uncommon need. 

The Solution: Target Income Funds

The solution to the problem of institutions losing AUM from outdated target date funds are target income funds. Target income funds are a fund of funds or mix of mutual funds or ETFs that are designed to generate a specific yield or income distribution using dividends from stocks and interest from bonds.

By using dividends and interest for income, it provides a more stable and reliable source of income, and protects against the sequence of returns risk since it does not require share liquidation to generate income. See our previous article, Real Income: Using Dividends and Interest to Avoid Running Out of Retirement Funds, on how dividends from stocks and interest from bonds are the most efficient and effective way to generate income for retirees.

Below is a sample 4% target income fund (Table 1) that generates 4% in income entirely from its yield. This would meet a situation where a retiree needs $40,000 per year from their $1 million portfolio. In this example, the table below shows the annual income each investment position would generate based on their respective yields. 

Sample 4% Target Income Fund

Table 1

Fund	Asset Class	Percent of Portfolio	Investment Amount	Yield	Annual Income
Dodge & Cox Stock Fund	U.S. Large Cap	15%	$150,000	1.27%	$1,905
Franklin Income Fund	Dividend Equity Income	25%	$250,000	5.01%	$12,525
Capital Income Builder	Global Equity Income	20%	$200,000	2.47%	$4,940
Loomis Sayles Bond Fund	Long Bond Fund	20%	$200,000	4.42%	$8,840
American High Income Trust	High Yield Bond	20%	$200,000	6.27%	$12,540
	TOTAL	100%	$1,000,000	4.08%	$40,750

Source: Morningstar

Using a mix of mutual funds from multiple fund families as an example, the portfolio is allocated with 60% equities (stocks) and 40% bonds. Based on each fund's yield, the average yield of the portfolio is 4.08% generating approximately $40,750 in annual income from a $1 million portfolio. By designing a portfolio based on asset allocation and yield of each fund, it is possible to generate the desired annual income needed by the retiree.

Constructing an income portfolio based on yield is a fairly simple task. The real art and science lies in the rebalancing and reallocation of the positions of the portfolio as interest rates and prices change over time. Maintaining the overall current yield or target income of the portfolio while continuing to position it for growth over the long term is the ultimate objective.

Since investors’ needs vary in how much income they need from their investments, at Watni we have designed target income funds that generate income distributions ranging from 1%-6%. 

White Label Customization

To help institutions retain AUM, based on our method of portfolio construction to attain a specific target income (distribution rate), it is possible to create customized or white-labeled target income funds for a specific financial institution using their own mutual funds or ETFs. The fact that all institutions that have target date funds have a comprehensive offering of bond and stock funds, including dividend equity funds, we are able to construct white-labeled target income funds ranging from 1%-6% in yield.

In fact, it is also possible to design multiple target income funds based on risk tolerance, such as conservative, moderate and aggressive, that generate the same yield (income) or distribution rate.

This white label solution would provide investors who own outdated target date funds an option to convert into a target income fund that meets their income and risk tolerance needs. It would then ensure that the institution would retain those assets from their outdated target date funds.

Conclusion

Target income funds should be considered as an offering by every financial institution that currently offers target date funds. 

With approximately 4 million Americans reaching age 65 each year through 2030, it is imperative that financial institutions provide an investment vehicle that generates sufficient, reliable and stable income to its retired investors. We believe target income funds are the solution.