Should You Choose Target Date Funds? Understanding the Real Trade-Offs

Target date funds occupy a prominent place in retirement planning strategies, yet whether they’re truly good for your financial future depends heavily on your specific circumstances and how you use them. While millions of 401(k) plan participants rely on these automatic investment vehicles, the reality is more nuanced than the conventional wisdom suggests.

The Case for Target Date Funds: Simplicity and Convenience

The appeal of target date funds lies in their straightforward approach. These funds eliminate the need for ongoing portfolio decisions by automatically shifting your asset allocation as you approach retirement. For many workers, this hands-off strategy removes the burden of constant rebalancing and market timing decisions—letting algorithm-driven management handle the heavy lifting.

This convenience translates into a significant advantage: if the fund you select is well-constructed, you can invest consistently month after month without worrying about whether your portfolio remains balanced. The effort barrier is minimal, which often means people actually stay invested and benefit from compound growth.

Fee Structure Matters: Evaluating Target Date Fund Costs

The quality of a target date fund hinges critically on its cost structure. The most effective target date funds build their portfolios using simple, low-cost exchange-traded funds and index mutual funds. The best performers avoid high-fee actively managed funds entirely, and they keep management fees minimal—since, theoretically, computer algorithms could manage them just as well.

Historical data shows improvement in this area. By the end of 2021, the average expense ratio for target date funds had declined to 0.34%. However, not all 401(k) plans offer access to these efficient options. When your plan lacks low-fee alternatives, it may be worth the extra effort to individually select and manually rebalance lower-cost funds instead.

The All-Or-Nothing Commitment: Why Partial Adoption Defeats the Purpose

A critical but often overlooked requirement for target date funds to work effectively is total commitment across all your accounts. If you invest primarily through a target date fund but supplement with additional individual stocks or sector-specific ETFs on the side, you’re fundamentally disrupting the carefully balanced allocation. This partial approach defeats the core benefit of target date funds.

Once you introduce supplemental investments, the logic shifts entirely. You might as well take full control by investing exclusively in individual ETFs that offer greater flexibility and customization, rather than accepting the restrictions and potentially elevated fees of target date funds. The key insight: target date funds deliver their greatest value when they’re your sole investment vehicle across every retirement account you maintain.

The Retirement Reality: Why Target Date Funds Fall Short Later

Where target date funds reveal a significant weakness is after you’ve actually retired. Research from academics at the University of Arizona and University of Missouri reveals a troubling limitation: these funds don’t position retirees well for sustainable withdrawals, they constrain potential wealth growth, and they provide limited downside protection during market stress.

The mechanics explain this shortcoming. Target date funds transition into extremely conservative allocations once you reach retirement. A typical fund might increase its bond and Treasury bill holdings from approximately 65% at retirement to 83% just 15 years into retirement. With such a heavy concentration in fixed-income securities, your portfolio loses its capacity for meaningful capital appreciation—exactly what you need during a potentially 30+ year retirement.

The traditional 60/40 portfolio—allocating 60% to stocks and 40% to bonds—addresses this limitation more effectively. While it requires regular rebalancing discipline from the investor, this balanced approach enables significantly higher sustainable withdrawal rates while generating superior wealth accumulation over time.

Making the Right Choice for Your Situation

Target date funds can be valuable tools during your working years if they keep you invested consistently and prevent emotional decision-making. However, their one-size-fits-all design creates genuine constraints, particularly once retirement begins.

The path forward requires honest self-assessment. Evaluate whether target date funds truly serve your long-term needs, especially as you approach and enter retirement. If you discover that a low-cost, well-structured target date fund exists within your plan and you’re willing to commit fully to it, the simplicity may justify continued use. Conversely, if your plan’s options carry higher fees or you anticipate needing greater flexibility in retirement, exploring alternative approaches makes strategic sense. The most important decision isn’t necessarily choosing target date funds—it’s choosing the right strategy for your unique financial situation.