Target date funds dominate retirement saving today. According to the Investment Company Institute, 60% of 401(k) participants hold target date funds, with younger participants investing over half their assets in them. These “set it and forget it” investments promise simplicity. Pick a fund near your retirement year, and professionals handle the rest.
But simplicity comes with hidden costs.
Target date funds hold approximately $2.8 trillion in assets, according to government estimates. Many employers make them the default 401(k) option. Despite their popularity, target date funds carry risks that rarely get discussed. Understanding these helps you make better retirement decisions.
What are target date funds?
Target date funds automatically shift from stocks to bonds as you age. This happens along a “glide path.” Young investors get growth from stocks. Older investors get stability from bonds. Everything happens automatically.
Fund companies position these as complete retirement solutions. Pick your year and forget about it.
But this approach creates significant problems.
Risk #1: Your personal circumstances are ignored
Target date funds assume everyone retiring in the same year needs identical strategies. They ignore your health, your spouse’s timeline, your pension, and your Social Security benefits.
Consider two 55-year-olds targeting 2035. One has chronic health issues. The other has longevity in their family. Both get the same investment mix despite vastly different needs.
The fund can’t adjust when life changes. An inheritance, medical bills, or early retirement plans don’t matter. The fund continues its preset path regardless.
Retirement planning requires personalization. Target date funds deliver the opposite.
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Risk #2: Automatic rebalancing reduces returns
Target date funds constantly rebalance. When stocks rise, they sell to buy bonds. This forces you to sell winners and buy losers.
As Peter Lynch famously said, “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”
During bull markets, you miss continued gains. The fund mechanically reduces stocks even when conditions favor staying invested. It doesn’t consider valuations or economic conditions.
This especially hurts younger investors with decades until retirement. Their fund sells stocks after every rally, reducing wealth accumulation over time.
For taxable accounts, there’s another problem. While the fund’s internal rebalancing doesn’t trigger taxes, the fund still makes capital gains distributions to shareholders. Vanguard’s 2021 distributions shocked investors with tax bills 40 times higher than previous years. The 2025 fund expects to distribute 4.29% in capital gains this year.
Risk #3: Double fees for the same service
Target date funds already include professional management with built-in fees. When advisors recommend these funds without adding value beyond the fund selection, investors pay for asset allocation twice.
Target date fund expense ratios average 0.44%. Some charge over 1.5%. These fees pay for the fund company’s asset allocation decisions.
When target date funds are included in the portfolio strategy, investors essentially pay twice for the same service. The fund company provides asset allocation. Yet some professionals place clients entirely in these funds while charging their standard fee on top.
The redundancy becomes clear when you examine what target date funds already do. They select investments, rebalance regularly, and adjust risk over time. If that’s all an investor needs, why pay twice?
Smart advisors add value beyond simple fund selection. They provide tax planning, estate strategies, and personalized advice that target date funds can’t offer. They actively manage asset allocation based on market conditions, client circumstances, and opportunities that mechanical funds miss. They can overweight sectors showing strength, reduce exposure during uncertainty, and adjust strategies as life changes occur.
Risk #4: Dramatic differences between providers
All 2050 funds sound similar but differ dramatically. Equity allocations for same-age investors vary by 40 percentage points across providers.
Different providers start with vastly different equity exposures—some at 90%, others at 99%. Near retirement, the differences become extreme. Some funds drop to 10% stocks while others maintain 60%—a sixfold difference in equity exposure.
Glide paths also vary between “to” and “through” approaches. “To” funds reach their most conservative allocation at retirement. “Through” funds continue reducing equity for 10-20 years after.
During the 2008 financial crisis, some funds lost 40% while others lost under 10%. Investors expecting to safely retire in 2010 experienced significant and unexpected risk.
The Department of Labor warns that identical target dates can have “very different investment strategies.” Most investors never check.
Risk #5: Designed for mediocrity
Target date funds aim for average returns by design. They commonly track market indexes, meaning you’ll typically match the market, minus fees, rather than beat it. Built-in diversification can limit growth potential. When one asset class soars, others might drag down overall performance. Every winner potentially gets diluted.
Young investors often hold unnecessary bond allocations. Even 10% bonds for someone with four decades until retirement can compound into significant opportunity costs over time.
Many funds shift conservative earlier than necessary. If you retire at 65 and live to 95, you might spend three decades in a portfolio designed for a shorter timeline.
Target date funds lock you into predetermined strategies. They can’t pursue emerging opportunities or adapt when conditions change. They follow their formula regardless of what might be possible.
The fund companies call this “prudent,” but it may not suit investors who need growth to fund lengthy retirements. For example, those starting late who need to catch up, investors with a FIRE objective, or anyone else seeking more than baseline returns.
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Better alternatives exist
Understanding these risks is just the first step. The real challenge is knowing what to do instead.
Professional portfolio management offers what target date funds can’t. Unlike rigid formulas, active management responds to opportunities. When markets shift, professionals adjust. When your life changes, financial plans evolve. When tax laws change, strategies adapt.
Your retirement portfolio should reflect your unique circumstances—your health, your family, your goals, your risk tolerance, and more. It should pursue returns sufficient to meet your needs while managing appropriate risk. It should coordinate with your other assets, your income sources, your estate plans.
Target date funds can’t do any of this. They follow their preset path regardless.
The difference between settling for a target date fund and working with professionals isn’t just about returns. It’s about confidence. Knowing someone monitors your investments. Understanding your strategy. Having a plan that adapts as life unfolds.
Your retirement is too important for a one-size-fits-all solution.
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