Signing up for a workplace 401(k) plan helps you build retirement savings efficiently. With a traditional 401(k), contributions are made on a pretax basis, and investment gains are then tax-deferred, which means there’s no yearly tax bill to pay. Roth 401(k)s are funded, meanwhile, on an after-tax basis, but investment gains and withdrawals are tax-free.
In either case, your money needs to grow in accordance with your needs, and that means you need to choose the right investments. On a broad level, there’s no data pointing to the percentage of 401(k) savers who actively pick funds for their savings. Among savers in Vanguard retirement plans specifically, only 31 percent choose their own investments.
Many 401(k) savers may not actively choose investments because they don’t realize they’re supposed to choose specific assets or they find the task daunting (or they like what’s been chosen for them). If you don’t log in to your account to choose investments, your employer might choose them for you, which is legal. And much of the time, in the absence of picking funds yourself, your money will be routed to a target date fund.
Vanguard reports that 96 percent of its retirement plans offered target date funds at year-end 2025. And among plans in which employers chose default investments for 401(k) savers, 98 percent of those investments were target date funds. But financial advisers say target date funds aren’t always the best choice.
How target date funds work
When you invest for retirement, your strategy usually needs to change over time. When retirement is decades away, the strategy can be to chase growth and take on more risk by putting most of your money into stocks. At that stage, your portfolio has time to recover from any stock market rout before you need to use the money.
As retirement nears, it’s often best to shift more of your assets into less risky investments, such as bonds. That way, a stock market crash doesn’t wipe out your nest egg right before you stop working.
A target date fund does that rebalancing for you. You pick a fund based on your expected retirement date, and the fund shifts assets around according to that timeline. Target date funds usually start out with a heavier load of stocks and gradually grow more conservative as your retirement date gets closer.
The problem with target date funds
Target date funds can work well, but it’s important to understand their limitations.
Matt Hylland, a financial planner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa, says, “Target date funds can be a great option for someone who wants to set their 401(k) savings strategy on autopilot and not have to worry about regularly keeping up with the investments.”
However, he cautions, these funds can charge high fees, known as expense ratios, that can erode your returns over time.
“If you have a target date fund from Vanguard, you’ll likely have very low fees,” he says. “However, there are many other target date funds that charge between 0.50 percent and 1 percent in annual fees.”
Vanguard puts the average expense ratio for target date funds at 0.41 percent. If your 401(k)’s target date fund charges a much higher fee, Hylland suggests seeing whether your plan offers lower-cost funds that suit your investment strategy.
An S&P 500 index fund, for example, might come with a lower expense ratio while allowing you to invest in the stock market at a broad level. You could pair that with a bond market fund and rebalance manually as retirement gets closer.
Some 401(k) plans also offer both actively managed target date funds and passively managed ones. An actively managed target date fund has a portfolio manager who buys, sells and adjusts investments. A passively managed target date fund simply tracks underlying market indexes, often resulting in significantly lower fees.
Hylland also says you may want to avoid target date funds if you want a more aggressive asset allocation.
“Target date funds get very conservative as you age, usually as low as 30 percent in total stock exposure. Make sure that conservative allocation works with your plan,” he says. “Depending on your assets and other sources of retirement income, you may want a higher allocation to stocks in order to have a better chance at keeping up with inflation over time.”
You shouldn’t be in the dark
Regardless of whether you choose target date funds, the one thing you don’t want to do is let your 401(k) land in one without knowing how your money is invested or what fee you’re being charged.
Zachary Mineur, chief investment officer at Independence Square Advisors in King of Prussia, Pennsylvania, says, “Participants should reach out to their HR departments, log in to their workplace portals, or read the plan documents to learn what the default is and what other available options there may be.”
If you don’t understand those options, Mineur says, you can consult a financial planner, who can help you choose investments for your 401(k) based on your age, risk tolerance, outside assets and overall goals.
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