Imagine two investors, both 45 years old, who plan to retire in 2045. Both participate in their employers' 401(k) plans and were automatically defaulted into the 2045 target-date fund when they enrolled, but their financial circumstances differ significantly. While one investor has accumulated substantial savings, anticipates receiving a pension, and is comfortable taking investment risks, the other has limited retirement savings, no pension, and expects to lean heavily on his 401(k) to cover living expenses in retirement. These two investors need two different retirement plans, yet their target-date funds follow the same investment strategy.
This example highlights one of the biggest target-date fund limitations: not accounting for an individual's unique financial circumstances despite simplifying retirement investing. Understanding their benefits, where they fall short, and available alternatives can help investors decide if and how to use target-date funds.
Key Takeaways
- What they are: Target-date funds are all-in-one retirement funds built around a target retirement year, holding a diversified mix of stocks and bonds that automatically rebalances along a preset glide path.
- Why they’re popular: They simplify investing, provide instant diversification, auto-rebalance, grow more conservative as retirement nears, and (when built from index funds) are often very low-cost.
- A one-size-fits-all catch: Since glide paths are based on retirement year alone, two 45-year-olds with vastly different savings, pensions, and risk capacity can still end up with the same portfolio.
- What they miss: Target-date funds don’t personalize based on risk tolerance, tax-planning opportunities (e.g., tax-loss harvesting), or a sustainable withdrawal strategy addressing sequence-of-returns risk.
- Who should think twice: Investors with complex finances, multiple account types, unique risk preferences, early/delayed retirement timelines, or little time before retirement may benefit from a more customized approach whether on their own or with an advisor.
What is a target-date fund?
A target-date fund is an investment fund designed to help investors save for retirement by automatically adjusting its asset allocation over time. Each fund—typically holding a diversified mix of investments including domestic stocks, international stocks, and bonds—has a designated target year (e.g., 2040, 2045, or 2050) roughly synced to the expected retirement age.
Likely path to a target-date fund
If you’re invested in a target-date fund, there’s a good chance you didn’t personally proactively choose this option since most 401(k) and 403(b) plans use this as their default investment (often referred to as a Qualified Default Investment Alternative or QDIA). The plan automatically places contributions into the target-date fund closest to assumed retirement year at the time of enrollment and in the absence of an active selection. Many people stay with their very first investment selection—often not realizing alternative options are available—with the mention of a year (e.g., “2045” or “2050”) hinting at an ideal match by default. Sound familiar? Not about whether target-date funds are “good” or “bad,” the real question is whether the fund assigned by your plan is truly best for your circumstances. The information to follow will help answer this.
How does a target-date fund work?
A defining target-date fund feature is its glide path, determining how exactly the investment mix changes as retirement approaches. A relatively aggressive allocation—emphasizing stocks for the sake of long-term growth—is generally the first step, with a gradual shift toward more conservative investments (e.g., bonds) to reduce volatility as the target retirement date gets closer. Not all target-date funds follow the same glide path, however, with “to-retirement funds” designed to reach their most conservative allocation around the target retirement date while “through-retirement funds” continue adjusting allocations for the years thereafter.
Target-date fund advantages
Before exploring their limitations, it's important to know why target-date funds are now such a common retirement investment option. For many investors, they offer several meaningful benefits including…
Simplified retirement investing
This is perhaps the biggest target-date fund advantage. Building and maintaining a diversified portfolio typically tasks investors with choosing investments, setting an appropriate asset allocation, monitoring performance, and periodically rebalancing holdings. Target-date funds handle many of these responsibilities automatically—a simplicity that’s often especially valuable for investors who lack the time, interest, or experience to manage retirement investments independently.
Built-in diversification
Diversification helps spread investment exposure across different markets and securities rather than concentrating savings in a single investment. Most target-date funds provide this via investment across multiple asset classes (e.g., U.S. stocks, international stocks, and bonds).
Automatic rebalancing
Market movements can cause an investment portfolio to drift away from its intended allocation over time. If stocks outperform bonds, for example, an investor's portfolio may gradually become more heavily weighted toward equities than originally intended. Target-date funds automatically rebalance holdings to maintain the fund's designated allocation.
Glide path dynamism
While rebalancing maintains the fund's current investment mix, the glide path gradually changes this as the target date approaches: the former more like short-term adjusting and the latter more like long-term adjusting so investors can maintain the same investment with a more conservative portfolio as retirement nears.
More disciplined investing
Market volatility can tempt investors to make emotional decisions such as selling investments during a downturn or chasing assets that have recently performed well—behaviors known to undermine long-term investment performance. Target-date funds provide a structured investment strategy not requiring frequent allocation decisions on the part of investors, a hands-off approach keeping you more committed to long-term plans and less reactive to short-term market fluctuations.
Low investment costs
Many target-date funds, particularly those composed of passively managed index funds, have competitive expense ratios and can provide diversified investment management at a relatively low cost. Fees vary considerably among providers, though, with some funds using actively managed investments or more expensive overall. Be sure to compare costs before investing.
While all of these advantages make target-date funds a practical solution for many retirement savers, the features making them so convenient can also limit their ability to accommodate individualized financial needs.
Why target-date funds don’t always work for everyone
- Personalize your risk. The glide path is set by retirement year, not by your tolerance, capacity, or other income sources.
- Plan your taxes. It won't harvest losses in a taxable account or coordinate which holdings sit in which account type.
- Turn savings into income. It doesn't tell you how much to withdraw, when to claim Social Security, or how to sequence withdrawals.
- Manage sequence-of-returns risk. Growing more conservative helps, but poor returns early in retirement can still do lasting damage.
- Give you control. You can't adjust the underlying mix — nudge international exposure, tilt toward an asset class, or pick individual holdings.
Although target-date funds offer a straightforward retirement-investment strategy, their standardized structure has several limitations including…
A one-size-fits-all approach
Perhaps the biggest drawback of target-date funds is also what makes them so attractive: simplicity. While the fund is primarily based on an investor's anticipated retirement date (and this timing is certainly an important consideration), it doesn't tell the whole story; two individuals planning to retire in the same year may have much different financial circumstances whether with respect to income, savings, pensions, financial obligations, and/or expected retirement expenses. Think back to our two 45-year-old investors mentioned earlier. The investor with substantial savings and a pension may have more financial flexibility to withstand market fluctuations. The investor with limited savings and no pension? Less capacity to absorb significant losses. Should both invest in the same 2045 target-date fund, their portfolios would follow the same glide path regardless.
Individual risk capacity and risk tolerance shortfalls
Investment decisions should account for both an individual's risk tolerance and risk capacity, related but not interchangeable concepts. While the former refers to an investor's willingness to accept market volatility and potential losses, the latter describes having the financial ability to withstand those losses without putting goals in jeopardy. A 55-year-old investor with substantial savings, a pension, and relatively low retirement expenses, for example, may have the financial capacity to maintain significant equity exposure but feel anxious about a potential major market decline. Conversely, someone comfortable with risk may have limited financial capacity to absorb losses with insufficient retirement savings for anticipated expenses. Target-date funds generally don't account for these distinctions, their glide paths designed around retirement timing rather than individual risk preferences or financial circumstances. Some investors may thus find target-date funds too aggressive, while others consider them unnecessarily conservative.
Varied investment strategies
Some investors assume all target-date funds with the same retirement year are essentially interchangeable, but funds from different providers can have much different investment allocations, glide paths, fees, and underlying holdings. Reviewing all of these can help you better understand what exactly you’re investing in.
Limited flexibility
While target-date funds provide convenience via automatic investment decision management, this simultaneously limits investor control over the fund's underlying holdings. An investor, for example, generally cannot independently adjust the fund's allocation to international stocks, increase exposure to a specific asset class, or choose which investments to hold in different accounts.
A lack of personalized tax-planning strategies
In and of themselves, target-date funds don’t create terribly complex tax planning issues since they’re typically held within tax-deferred retirement accounts (e.g., traditional 401(k)s). Issues might arise, however, for those with a more complex financial picture. While plenty of strategies can help limit your tax burden (using tax-loss harvesting in taxable accounts to help offset capital gains, for example), creating a personalized tax planning strategy becomes far more challenging when you’re invested in a fund not meant for personalization—potentially leaving you less prepared for retirement, considering the importance of tax planning.
No comprehensive retirement income plan
Target-date funds help investors accumulate retirement savings and manage allocations over time, but they don't necessarily address a big retirement-planning challenge: turning accumulated savings into sustainable income while knowing how much you can withdraw each year, when to claim Social Security benefits, how to coordinate account withdrawals, and how to manage taxes during retirement. A retirement plan must also account for sequence-of-returns risk, potential impacts of poor investment returns early on in retirement. Consider two new retirees with identical portfolios who withdraw the same amount annually; both have the same average investment return, but one suffers substantial market losses during the first few years (at higher risk of savings depletion since withdrawals during a downturn stifle subsequent market recovery participation) while the other does so much later.
Although target-date funds are generally more conservative as retirement nears, they don't eliminate sequence-of-returns risk or automatically determine the best withdrawal strategy; a more comprehensive plan may be necessary to sync investments with income needs, spending expectations, and other financial resources.
Varied fees and investment performance
Many target-date funds are relatively inexpensive, while others charge higher fees that can reduce investment returns over time. The cumulative effect of this can add up over several decades—particularly when accounting for investment growth that could’ve otherwise occurred—but cost shouldn't be the only consideration, with investors also evaluating the fund's investment strategy, asset allocation, and overall suitability. A lower-cost fund isn't necessarily the better choice if its allocation doesn't align with your needs.
Who might want to think twice about target-date funds?
In general, target-date funds are an excellent option for those unsure of where to start when it comes to retirement savings. While they’re a decent option for most, that doesn’t mean they’re the best choice for everyone. The following investors may find it helpful to consider alternative retirement-savings vehicles…
Investors with complex financial situations
These investors may benefit from a more personalized approach, specifically those with multiple retirement accounts, substantial taxable investments, pensions, business interests, or other significant assets who need to coordinate their investments across accounts and have more control over individual holdings (with the flexibility to execute asset allocation, manage taxable distributions, and implement tax-planning strategies). A target-date fund can still play a role in their portfolios, but relying on one without considering other holdings may lead to unintended investment exposure.
Investors with unique risk preferences
Some investors have a higher or lower risk tolerance than their target-date fund assumes. For example, a person planning to retire in 15 years may feel comfortable with a relatively aggressive allocation amidst other reliable income sources. Another investor with the same retirement timeline who can’t afford significant losses may prefer a more conservative approach.
Investors approaching or already in retirement
As retirement nears, investment decisions often get more complicated as retirees balance the need for continued investment growth with the need to generate income and protect against significant portfolio losses. While target-date funds can remain useful during retirement, they won't replace a comprehensive retirement income strategy.
Investors with unconventional retirement timelines
Someone planning to retire at age 50 may have different investment needs than a person planning to work until age 75. Early retirees in particular may need their investments to support a longer retirement period, while those delaying retirement may have additional years to accumulate savings. A standard glide path may not adequately reflect either of these circumstances.
Importantly, belonging to one of these groups doesn't automatically mean an investor should avoid target-date funds but rather points to the value of evaluating the fund within the context of a broader financial plan.
Target-date fund alternatives
Investors seeking more control over their retirement portfolios have several alternatives offering varying degrees of flexibility, customization, and professional oversight. Largely depending on where your retirement savings live, options include…
Building your own mix from your plan’s menu
Every 401(k) and 403(b) plan offers a menu of investment options beyond target-date funds, typically including domestic stock index, international stock, bond, and balanced or target-risk funds. Rather than defaulting to a single target-date fund, participants can manually allocate contributions across these options. If you’re 20 years from retirement and want more stocks than your plan’s target-date fund offers, for example, you might put 50% into a total U.S. stock index fund, 30% into an international stock index fund, and 20% into a bond index fund—tasking you with reviewing plan options, selecting allocations fitting your risk tolerance and timeline, and rebalancing periodically since the plan won’t do this automatically. The trade-off? More flexibility and responsibility. If you’d rather not actively manage allocations, this approach may create more work than it’s worth.
Using a managed account service (if your plan offers one)
As an upgrade from the default TDF, many 401(k) plans now offer managed account services often provided by firms (e.g., Empower, Fidelity, or Morningstar) to build a personalized portfolio using funds available in your plan and considering factors beyond your retirement date: account balance, outside assets, savings rate, risk tolerance, and spousal accounts. The main trade-off here is cost, since managed account services usually charge an extra annual fee deducted directly from the account (often 0.25% to 0.60% of its value). While the added customization is perhaps not worth the price for more straightforward situations, the extra help can be valuable when finances are complex.
Considering an in-service rollover (if your plan allows this)
Some 401(k) plans allow current employees to roll a portion of their account into an IRA while still working, typically after age 59½ though specific rules vary by plan. An in-service rollover opens up the full universe of IRA investments: exchange-traded funds (ETFs), individual stocks and bonds, and the ability to work with an outside advisor who manages the account. Not all plans offer this, and it’s not without trade-offs; you may need to give up some 401(k)-specific protections (e.g., penalty-free withdrawals at age 55 if you separate from service or stronger creditor protection in some states), so it’s worth exploring with a financial advisor before acting.
Coordinating with outside retirement and taxable accounts
If you have an IRA, Roth IRA, or taxable brokerage account along with a 401(k), the more flexible accounts can hold the ETFs, individual funds, or customized portfolios the 401(k) can’t. In this case, the target-date fund stays in the 401(k) but is treated as one piece of a broader allocation rather than the entire plan. If your 401(k) TDF holds 70% stocks and 30% bonds and you’re seeking 80/20 overall, for example, your outside Roth IRA might hold 100% stocks to tilt the combined mix in your preferred direction. Doing this well means looking at all accounts in combination, making financial advisor assistance particularly valuable here.
Working with a financial advisor
Working with a financial advisor is often a worthwhile step for investors with multiple accounts, complex tax situations, or life stages not aligned with a standard glide path. More specifically, an advisor can review your 401(k) plan menu and recommend a custom allocation using available funds, coordinate this with your outside accounts, and build a broader retirement strategy factoring in Social Security timing, withdrawal sequencing, and tax planning. It’s important to understand the compensation structure, qualifications (CFP® certification is a strong signal), and whether services match what you actually need before you engage someone.
Is a target-date fund right for you?
You’ll need to look beyond a fund’s target year to assess its suitability for your retirement portfolio. First, examine its current asset allocation—considering whether the mix of stocks, bonds, and other investments aligns with your risk tolerance and ability to withstand market losses—then review its glide path to know how the allocation will change as retirement approaches and whether that matches your financial needs. Also consider outside investments; a target-date fund seemingly well-diversified on its own can indeed concentrate when combined with other retirement accounts or taxable investments. Fees are another consideration; comparing expense ratios among target-date funds and alternative investments can help identify unnecessary costs, although investment suitability is most important overall.
Finally, think about your preferred involvement in retirement savings management. Want a straightforward investment strategy with fairly simple financial circumstances? A low-cost target-date fund may have everything you need. Want more control over asset allocation, tax planning, or retirement income strategies? A more customized approach is worth exploring.
Remember: this decision need not be all or nothing. A target-date fund can serve as one component of a broader investment strategy, and investors may even find that selecting a different target year provides an allocation better reflecting their circumstances—though this should be based on a careful evaluation of the fund's underlying investments and glide path rather than higher potential returns.
The bottom line
Target-date funds offer various advantages: simplifying investing, providing diversification, and automatically adjusting asset allocations over time. For many retirement savers (particularly those wanting a hands-off approach), these features provide a practical way to build long-term savings. It’s important not to confuse convenience with personalization, however, as a target-date fund cannot replace a comprehensive retirement plan. Ultimately, the question isn't whether target-date funds are either “good” or “bad” investments; it's whether a specific fund supports your overall financial goals. For a broader look at coordinating investments with the rest of your financial life, check out our retirement planning guide. Just getting started with investing? This article will walk you through the fundamentals.
Have questions about target-date funds or your overall investment strategy? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.
Reviewed for accuracy
Benjamin Stark, CFP®
Financial Advisor and Director of Client Experience at Vision Retirement, with 10+ years as a financial advisor.
Read full bio →FAQs
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Automatically rebalancing and adjusting asset allocations over time to reduce the need for active portfolio management, target-date funds are often a good option for individuals seeking a diversified, low-maintenance approach to investing. Nevertheless, their suitability depends on an investor’s risk tolerance, overall financial circumstances, and retirement goals. People with more complex financial needs may benefit from a customized investment strategy instead.
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Yes. Target-date funds are subject to market risk; investors can indeed lose money (including close to or during retirement) despite these funds generally shifting toward more conservative investments as target dates approach since they still hold assets that can fluctuate in value. Diversification and automatic allocation adjustments can help manage some risk but don’t guarantee returns or protect investors from losses.
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Reaching a target-date fund’s designated retirement year doesn’t necessarily mean the fund will close or distribute its assets. While some funds reach their most conservative allocation around the target date, others continue adjusting their investment mix throughout retirement. Investors can generally remain invested after reaching the target year but should reassess whether the fund’s allocation and withdrawal arrangements continue to support their specific financial needs.
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Most 401(k) plans use target-date funds as the default investment for employees who don’t make a proactive choice, referred to as a Qualified Default Investment Alternative (QDIA). Employees can typically log into their plan’s portal and switch at any time if they so desire.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business. There is no assurance that the techniques and strategies discussed herein are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF's net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as a lack of diversification, possible trading halts, and index tracking errors. This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.
