Are Target Date Funds a Good Idea? Pros, Cons & Alternatives
They're the default choice in most 401ks, but are they actually good for your retirement? Here's the honest truth.
Key Takeaways
- 1Target date funds provide automatic diversification and rebalancing
- 2They're a good "set it and forget it" option for hands-off investors
- 3Fees are often higher than building your own portfolio with index funds
- 4The "glide path" may not match your specific needs
- 5One-size-fits-all means they're not optimized for anyone
- 6Consider alternatives if you want more control or lower fees
What Are Target Date Funds?
A target date fund (TDF) is a mutual fund designed to be your only investment, automatically adjusting its risk level as you approach retirement:
- You pick a fund based on your expected retirement year (e.g., "Target 2040")
- The fund holds a mix of stocks and bonds
- As retirement approaches, it automatically becomes more conservative
- This shift is called the "glide path"
- After retirement, it continues to adjust for decades
- Became the default investment in most 401ks after 2006 Pension Protection Act
The Pros: Why TDFs Can Be Good
Target date funds have legitimate advantages:
- Simplicity: One fund, done—no decisions to make
- Automatic rebalancing: Stays on track without your involvement
- Professional management: Experts handle the allocation
- Prevents emotional trading: Hard to panic sell when it's your only option
- Appropriate for beginners: Better than doing nothing or all cash
- Prevents over-concentration: Forced diversification
The Cons: The Problems Nobody Mentions
Target date funds have significant drawbacks that providers downplay:
- Higher fees: Often 0.5-1.0%+ vs 0.03% for basic index funds
- Generic glide path: May not match your actual needs
- Year-based is arbitrary: Your retirement date doesn't define your risk tolerance
- Hidden fund-of-funds: May hold expensive underlying funds
- Can't customize: Locked into their allocation decisions
- May be too conservative too early: Lost growth potential
| Factor | Target Date Fund | DIY Index Portfolio |
|---|---|---|
| Typical Expense Ratio | 0.40% - 1.00% | 0.03% - 0.10% |
| Effort Required | Zero | 1-2 hours/year |
| Customization | None | Complete control |
| Cost on $500k over 20 years | $40,000 - $100,000+ | $3,000 - $10,000 |
| Rebalancing | Automatic | Manual or automatic |
| Gold/Alternatives | Usually none | Your choice |
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Who Should Use Target Date Funds
TDFs are a good fit for certain investors:
- Beginners who might otherwise invest poorly or not at all
- People who will never check their 401k or rebalance
- Those who would panic-sell during market drops
- Anyone who wants absolute simplicity above all else
- People with very small balances where fees matter less
- NOT ideal for: Anyone willing to spend 1-2 hours/year on their portfolio
Better Alternatives to Target Date Funds
If you're willing to put in minimal effort, these options can save you thousands:
- Three-fund portfolio: Total stock, international stock, bond index
- Lazy portfolios: Pre-built allocations using low-cost index funds
- Age-based rule: Stock allocation = 110 minus your age
- Total market index: Just buy the whole market at 0.03%
- Add gold: Something TDFs don't offer but provides true diversification
- Robo-advisor: Still automated but often lower cost
The Fee Difference Over Time
A 0.75% fee difference doesn't sound like much. But on a $500,000 portfolio over 20 years, that's approximately $75,000 less in your retirement account. That's the true cost of convenience.
True Diversification TDFs Can't Provide
Target date funds diversify across stocks and bonds—but those often fall together (like in 2022). A Gold IRA provides diversification that's actually different:
- Gold often rises when stocks and bonds fall
- Physical asset not tied to financial market performance
- Inflation hedge that TDFs lack
- Roll over portion of 401k to Gold IRA for true diversification
- Control your allocation instead of accepting their formula
Frequently Asked Questions
1Should I use my 401k's target date fund?
If it's low-cost (under 0.30%) and you want simplicity, yes. If fees are high or you're willing to spend an hour per year managing a simple portfolio, you can likely do better.
2What if my target date fund is the only good option?
Some 401ks have terrible options except for a decent TDF. In that case, use the TDF for your 401k and do your own investing in an IRA where you control the options.
3Can I use a target date fund for a different year?
Yes. If you want a more aggressive allocation, choose a later date (e.g., 2050 instead of 2035). For more conservative, choose an earlier date. Just understand you're overriding their assumptions.
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