Is It Time to Ditch Target Date Funds in Your 401k

Target date funds have become the default option in most 401k plans. You pick a fund based on when you plan to retire – 2040, 2050, 2060 – and it automatically adjusts your asset allocation as you age. Simple right?

Maybe too simple. And for some investors, simplicity might be costing them money.

The pitch for target date funds is convenience. You dont have to think about rebalancing. The fund gets more conservative as retirement approaches. Set it and forget it. For people who would otherwise make terrible investment decisions or not invest at all, this is genuinely valuable.

But there are problems. First: fees. Target date funds often layer fees on top of fees. The fund of funds structure means youre paying for the target date fund wrapper AND the underlying funds inside. Those costs compound over decades.

Second: one-size-fits-all doesnt actually fit all. A target date fund assumes everyone retiring in 2045 has the same risk tolerance, other assets, and retirement needs. They dont. Someone with a pension and Social Security has a very different situation than someone whose 401k is their only retirement savings.

Third: the glide paths vary wildly between providers. A 2045 fund from Vanguard might have a completely different stock/bond allocation than a 2045 fund from Fidelity. The “target date” is less standardized than people think.

Fourth: many target date funds underperform simple index fund strategies. The complexity doesnt necessarily add value.

Should you ditch your target date fund? If youre willing to educate yourself and actively manage a simple portfolio of index funds, probably yes. If you wont actually do that and will instead panic sell during downturns, probably no.

Know yourself. A decent strategy you stick with beats a perfect strategy you abandon.