Target-Date Funds Have Drawbacks

Updated July 2026

Target-date fund assets have ballooned over the past decade, fueled by their designation as the default option in many 401(k) plans. This growth makes it a good moment to examine these investments closely, as the SEC’s investor bulletin on target-date funds advises. Are they a reliable path to retirement? The short answer is yes. But that yes comes with several important caveats.

How Target-Date Funds Are Structured

Generally speaking, target-date funds have a date at which the fund will manage money toward. If you have 20 years until you may retire, there is a fund that will “target” that date. Theoretically, the fund will be more aggressive at the beginning of this 20-year cycle and gradually get more conservative as you get closer to retirement. Not all funds operate this way, as we will see below, but that is the gist of many of them.

These funds are basically an all-in-one investment stop. They tend to have all of the main investment vehicles in one fund. Large companies, small companies, growth companies, value companies, long-term bonds, short-term bonds, and cash are all included inside a target-date mutual fund. In addition, they automatically rebalance the portfolio on a regular basis, usually quarterly or yearly, so that the allocation of your funds is always back to the plan. Those two items right there are why these vehicles are a good option for many people. After all, we have all heard stories of a 30-year-old being all in bonds for fear of the stock market, or others trying to continually “time” the markets, or even others who have no idea what their funds invest in. For a good chunk of people, these target-date funds are just what the doctor ordered.

Most target-date funds are structured as funds-of-funds, holding a mix of underlying index or actively managed portfolios. The Vanguard Target Retirement series, for example, uses low-cost index funds to build its glide path. Fidelity Freedom Funds and T. Rowe Price Retirement Funds often blend actively managed components. Because they are qualified default investment alternatives (QDIAs) under Department of Labor rules, many 401(k) plans automatically enroll participants into a target-date fund. That convenience has driven massive inflows, but it also means millions of savers may not fully grasp what they own.

The Drawbacks of Target-Date Funds

Equity Exposure Near Retirement

For those people nearing retirement, you may be surprised to learn that some funds still have 50 or 60 percent of your assets allocated toward stocks. Nothing nefarious is going on. It is just that their philosophy requires you to be in stocks to protect against inflation. They may buy more conservative stocks as the target date nears and even slowly move your bond portion into cash and other short-term investments. But make no mistake, as was seen just three years ago, when stocks go down they tend to all go down together. It is important for you to know exactly how much exposure you have in equities, especially if retirement is right around the corner.

The SEC has warned that the name of a target-date fund may contribute to investor misunderstanding about risk near the target date. A fund labeled “2020” might sound safe, yet it could still hold a majority in stocks. The U.S. Senate Special Committee on Aging found significant differences in asset allocations and equity holdings of target-date funds, raising questions about whether plan sponsors and participants understand the underlying risks. During the 2008-2009 market crash, target-date funds near their dates lost heavily. Morningstar reported that the average 2010 fund fell 24% that year, a shock for workers just a year or two from retiring.

Data. Equity allocations reflect the stock holdings within each fund’s glide path. A higher expense ratio compounds the drag over time, especially for near-retirees who cannot afford large losses.

Consider this: over a 40-year career, a $10,000 investment in a target-date fund with a 1% expense ratio would grow to about $100,000 at a 7% return. The same investment in a fund with a 0.16% expense ratio would grow to about $145,000. That’s a $45,000 difference in final value, entirely due to fees. The cost is real, and it compounds silently.

Bond-Heavy Portfolios for Young Investors

For young people, and the word young in the investment world is generous, you may be surprised to learn that you have more bonds than you thought. With rates so low, those bonds may take a huge hit in any downturn, as your target-date fund will generally have a lot of long-term bonds in it. Maybe more importantly, you may just be too asset “allocated.” The general thrust of these funds is to be average performers, as you end up with nearly every stock in the country. It may behoove you to look around for some more aggressive funds for a portion of your assets. After all, by the very nature of 401(k) investing, you are dollar cost averaging into the riskier funds. And while it is undoubtedly difficult to root for, mathematically it would be nice if your aggressive funds went down every single month until such time that you begin cutting back as you age. Of course, that would be impossible to maintain as human nature would take over, but you get the idea. For youngish investors, the very structure of a 401(k) just screams out to be very aggressive, and target-date funds are really the opposite of that, no matter how far away the date chosen happens to be.

A 25-year-old in a 2050 target-date fund might find 10% to 20% of her portfolio in bonds. In 2013, the 10-year Treasury yield hovered around 2.7%, offering meager income and significant interest-rate risk. If rates rise, bond prices fall, and long-duration bonds inside the fund can decline sharply. That conservative cushion can actually become a liability. Meanwhile, the broad diversification across thousands of stocks means the fund will rarely beat the market by much. For a young investor with decades to ride out volatility, a higher stock allocation, perhaps 100% in a low-cost S&P 500 index fund, can harness the full power of compounding and dollar-cost averaging. The trade-off is greater short-term swings, but time is on your side.

However, this approach isn’t for everyone. Investors who are uncomfortable with volatility, even if they have a long time horizon, may find the high stock allocation of a pure index fund disconcerting. In that case, a target-date fund’s built-in diversification and gradual risk reduction may be a better fit, even if it means lower long-term returns. The recommendation fails for those who lack the emotional bandwidth to handle market swings, even if they’re theoretically justified.

Fees: The Silent Portfolio Killer

Expense ratios on target-date funds vary dramatically. According to Morningstar’s 2013 study, the asset-weighted average expense ratio for target-date funds was 0.78%. Actively managed series averaged 1.07%, while passive series came in at 0.48%. Some funds charge well over 1.5% when you factor in underlying fund fees and 401(k) administrative costs. Even a 1% annual fee can devour tens of thousands of dollars over a 40-year career. A $10,000 investment growing at 7% annually for 40 years would reach about $150,000 with no fees. With a 1% fee, it drops to roughly $100,000. That is a 33% reduction in final wealth.

The Department of Labor’s fee disclosure rules have helped, but many participants still do not examine the fine print. When you compare a Vanguard Target Retirement 2050 (expense ratio 0.16%) to a higher-cost competitor, the difference is stark. Over decades, those basis points compound just like returns. For hands-off investors, the convenience of a target-date fund is real, but it should not come with a steep price tag.

The Glide Path Isn’t One-Size-Fits-All

Not all target-date funds follow the same path. Some use a “to” retirement glide path, where the asset allocation reaches its most conservative point at the target date. Others use a “through” retirement approach, continuing to de-risk for years after the date. Vanguard, for instance, employs a through-retirement strategy, gradually shifting from stocks to bonds until about seven years after the target date. Fidelity and T. Rowe Price also have distinct philosophies. A 2020 fund from one provider might hold 50% stocks at the target date, while another holds 60%. The Senate committee’s investigation highlighted that two funds with the same target date can have wildly different risk profiles. That makes it essential to look past the date and read the prospectus.

Performance During Market Downturns

The 2008 financial crisis exposed the vulnerability of target-date funds. Many 2010 funds, designed for people on the cusp of retirement, plunged more than 30% from peak to trough. The SEC and Department of Labor launched reviews, and the Senate held hearings. While the funds eventually recovered, the experience showed that a target date is not a guarantee against loss. The automatic pilot cannot foresee a sudden market crash. Even in 2013, with the S&P 500 up sharply, the memory of that drawdown should remind investors that the glide path’s risk reduction is gradual, not instantaneous. A 2020 fund still held substantial equities in 2008, and it would again in any future downturn.

How to Evaluate Your Target-Date Fund

Start by looking up the fund’s ticker on Morningstar or your plan’s website. Check the current asset allocation, not just the name. Compare the equity percentage to your risk tolerance. If you are five years from retirement and the fund holds 60% stocks, ask whether you could stomach a 30% drop. Review the expense ratio and compare it to low-cost alternatives available in your plan. The underlying funds matter too: a target-date fund that holds high-cost actively managed funds will drag on returns. Finally, examine the glide path illustration in the prospectus to see how the allocation changes over time.

Plan sponsors have a fiduciary duty under ERISA to select appropriate investments. If your 401(k) offers only high-fee target-date funds, you may consider allocating to the plan’s lowest-cost index funds and building your own mix. That requires more effort, but it can save tens of thousands in fees while giving you precise control over risk.

Alternatives to Target-Date Funds

For investors willing to spend a little more time, a simple three-fund portfolio of U.S. stocks, international stocks, and bonds can replicate much of what a target-date fund does at a fraction of the cost. Using index funds from Vanguard, Fidelity, or Charles Schwab, you can set your own asset allocation and rebalance once a year. This approach lets you be more aggressive when you are young and dial back risk on your own terms. It also sidesteps the one-size-fits-all glide path. The downside is that you must have the discipline to stick with the plan during market swings and not chase performance. For many, the automatic rebalancing and professional management of a target-date fund are worth the extra cost, but it is not the only path.

Some 401(k) plans offer managed accounts that provide personalized advice for a fee. These can be an option if you want customization without the DIY burden. A BlackRock LifePath fund or similar series may also offer a different glide path philosophy that aligns better with your needs. The key is to know what you own and why.

Frequently Asked Questions

What is a target-date fund?

A target-date fund is a mutual fund that automatically adjusts its asset allocation over time, becoming more conservative as the target date approaches. It holds a diversified mix of stocks, bonds, and cash in a single portfolio.

How does the glide path work?

The glide path is the schedule that determines how the fund’s stock-to-bond ratio changes. Early on, the fund holds more stocks for growth; as the target date nears, it shifts toward bonds and cash to reduce volatility. Different fund families use different glide paths.

Are target-date funds safe for retirement?

Not entirely. Even near the target date, many funds still hold 50% or more in stocks, which can lose value in a downturn. They aim to manage risk, not eliminate it.

Why do target-date funds hold bonds for young investors?

To provide some cushion against stock market drops and to diversify. However, for investors with 30 or 40 years until retirement, bonds can drag down long-term returns and may suffer when interest rates rise.

Can I lose money in a target-date fund?

Yes. Target-date funds are not principal-protected. In 2008, the average 2010 fund lost 24%. The value fluctuates with the markets, and there is no guarantee you will have a certain amount at retirement.

What are the fees for target-date funds?

Expense ratios range from under 0.20% for passive series to over 1.50% for some actively managed funds. The average in 2013 was about 0.78%. High fees can significantly reduce your nest egg over time.

How do I choose the right target-date fund?

Look beyond the date. Compare the current asset allocation, fees, glide path, and underlying holdings. Pick a fund that matches your risk tolerance, not just your expected retirement year.

Should I use a target-date fund or build my own portfolio?

If you want simplicity and automatic rebalancing, a low-cost target-date fund is a solid choice. If you are comfortable managing a few index funds and rebalancing annually, you can save on fees and customize your risk level.

What happens when a target-date fund reaches its date?

The fund does not stop. It continues to manage assets, typically following a “through” or “to” glide path. In a “through” approach, it may keep de-risking for several more years. You can remain invested or move the money elsewhere.

Are target-date funds good for 401(k) plans?

They are a good default option because they provide diversification and automatic rebalancing. However, plan sponsors should evaluate fees and glide paths carefully, and participants should understand the fund’s risk, especially near retirement.