Target-date mutual funds are promoted as one-time, “set it and forget it” investments that automatically carry you from your early working days through to retirement, leaving you with a safe, stable nest egg.
The key feature of the funds is that they gradually move from an aggressive mix of assets that aim for growth during the investor’s working years to a more conservative, less volatile mix as the investor nears retirement — the fund’s target date. There’s no rebalancing, no funds to choose and no decisions to make. All the investor needs to do is make deposits.
The funds’ selling point is that they’re easy — too easy, according to many financial experts, who say that the funds can be either too risky or too conservative, and that they lull workers into thinking they’re fully prepared for retirement even when they aren’t saving enough.
“Baby boomers in target-date funds are in jeopardy of losing their lifetime savings,” said Ron Surz, president of the pension consultancy Target Date Solutions of San Clemente, Calif. The typical fund is mostly invested in risky assets at retirement, he said, “and people in those funds won’t know that until the stock market crashes.”
A big part of automatic 401(k) plans
Target-date funds debuted in the mid-1990s but became much more popular after the Pension Protection Act of 2006 allowed employers to automatically enroll new workers in 401(k) retirement accounts. The funds are federally approved as safe default investments. As a result, assets in the funds mushroomed to more than $4 trillion in 2024 from $408 billion in 2010, according to the Investment Company Institute.
Consider the case of a 33-year-old who will be 67 in 2060 and chooses a fund such as the iShares LifePath Target Date 2060 E.T.F., which now holds about 98 percent of its assets in stocks and transitions to a traditionally conservative mix of 40 percent stocks and 60 percent fixed-income assets by 2060. Other funds arrive at their target date holding as much as 60 percent of their assets in stocks.
Either one of those final mixes means the fund could take a sizable hit during a big market drop. Even with the recent decline during the war in Iran, stock markets remain near record highs, and with 4.1 million baby boomers set to reach retirement age this year, the asset mix of target-date funds looks increasingly dangerous.
A potentially bumpy road
It comes down to what fund managers call the glide path, the fixed timeline that determines how and when the asset mix changes.
Besides the risk that funds may hold too much stock when someone retires — which could expose retirees to market downturns — the fixed glide path can limit gains for investors, experts say. By hewing to a formula set by the fund company, fund managers may be forced to buy assets when prices are high or sell when prices are low.
The result can be a fund that underperforms its benchmark or a simple, low-cost E.T.F. that tracks the S&P 500 or another established index.
“The fund managers have their hands tied,” said Michael Crews, chief executive of North Texas Wealth Management in Allen, Texas. “They can’t say: ‘Hey, this stuff doesn’t make sense right now. This is the time to pull back on risk.’”
Investor confusion can be a danger
A bigger problem with target-date funds is that many investors don’t know how they work. A 2025 survey for American Century Investments of 1,500 people in workplace retirement plans found:
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Thirty-four percent thought target-date funds guaranteed they wouldn’t lose money.
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Nearly 40 percent didn’t know they were invested in target-date funds or thought their employer’s plan didn’t offer them.
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Thirty-seven percent said they simply didn’t understand target-date funds.
The survey also found that 45 percent of those investors would be uncomfortable if their target-date fund lost more than 10 percent in the five years before retirement. However, these funds posted just such losses during earlier downturns.
In February and March 2020, early in the Covid-19 pandemic, funds with 2020 target dates from Vanguard, Fidelity, American Funds and T. Rowe Price fell by 17 percent to 24 percent. From 2007 to 2009, similar funds with a 2010 target date fell more than 40 percent during the Great Recession. A retiree starting fund withdrawals at that time may have faced losses big enough to risk running out of money during retirement.
“These funds set up the expectation that I can not look at my investments and I’ll be OK,” said David Marra, chief investment officer of Markin Asset Management in Rye, N.Y. “That’s a dangerous expectation.”
Yet more confusion
The bigger danger arises when these auto-enrolled, set-it-and-forget-it funds combine with the generally accepted advice that workers must contribute enough of their pay to receive the maximum matching contributions from their employer. Taken together, those factors can lull workers into thinking they’re adequately providing for their retirement, when they’re likely to end their working days without nearly enough savings.
“It’s like, ‘Hey, it’s free money!’ But guess what. You’ve completely avoided asking, ‘Is that going to allow me to replace my income in five, 10, 20, 25 years?’” said Lee Munson of Portfolio Wealth Advisors in New York. “You end up with a whole generation of people putting in the minimum amount of money they should invest.”
A good place to start
Even the harshest critics of target-date funds say they are better than nothing and are preferable to people picking their own 401(k) investments.
A 2021 study in The Journal of Pension Economics & Finance found that 401(k) participants who put all their money in a single target-date fund gained 2.3 percent more annually than participants who selected other types of funds in their employer plans.
“People do at least 10 percent worse, on average, than they would in their auto-enrolled target-date funds,” said Jon Cracraft, director of financial planning at C.H. Douglas & Gray Wealth Management in Indianapolis. “You are far likely to do better by just going with a target-date fund.”
Other planners say the funds can be a good starting point for retirement savings.
With a long time to invest, they can be a great tool, Mr. Crews said. “But when your time horizon shrinks below 10 years, you need to get laser-focused on risk exposure, timing, distribution and planning.”
Making target-date funds work
You can build a good retirement strategy with target-date funds. If you have a choice, financial planners recommend an index-based fund with low fees.
Understand what you own. A fund that downshifts to a conservative mix of 60 percent bonds and 40 percent stocks can lose money. In your pre-retirement years, consider moving some holdings to a money-market fund or other cash equivalent, to avoid selling at a loss if the market swoons when you retire.
Target-date funds come in many forms. Many of the biggest ones, like those run by Vanguard, are made up of lower-cost index funds. But there are many actively managed funds, too, and it’s important to know what’s inside your funds so you won’t be disappointed when you need your retirement cash.
Understand the glide path. The fund prospectus may describe how it adjusts over time, so you can see how much stock you’ll hold during the crucial five years before and after retirement. Otherwise, you may need to search online or call the fund company. Remember that a 20 percent market correction happens, on average, every seven years.
Make them a part of your portfolio. You can save in your employer’s target-date fund up to the employer match, then diversify by adding other investments in an individual retirement account, a Roth I.R.A. or an investment account. You can consult a fee-only financial planner to create a plan.
Get ready. The closer you get to retirement, the more personalized your financial plan should be. Investors should meet with a financial planner at least five years before they retire.
Invest enough. Auto-enrollment plans contribute a small portion of your paycheck. Planners recommend saving 15 percent, with 10 percent as the bare minimum.
Don’t “set it and forget it.” Review your fund performance once a year and make any needed adjustments, such as increasing your contributions.
“People have divorces or other life events, along with expectations about their retirement,” said Mr. Marra of Markin Asset Management. “It’s a very naïve idea that you can pick one point in time and that 20 years later you’ll land where you want to land.”
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