Target date funds (TDFs) are a popular “set-it-and-forget-it” option in many 401(k) plans. They’re designed to automatically adjust your mix of stocks and bonds over time, becoming more conservative as you approach a chosen retirement year (for example, a “2055” fund for someone retiring around 2055). Simplicity is their main appeal: pick a date, contribute regularly, and let the fund handle the rest.

Target date funds can be a reasonable option for some investors, particularly those who prefer simple, professionally managed allocation and who may not otherwise rebalance their portfolios.

But simple doesn’t always mean appropriate. Target date funds are built for the “average” person, but everyone’s situation is unique. Depending on your financial situation, retirement timeline and retirement goals, you may be leaving a lot of money on the table with a target date fund.

Here are some reasons target date funds in 401(k) plans may not be right for you.

1. Target Date Funds Assume Your Retirement Date Is the Main Variable

Target date funds are driven by only one input: the year you expect to retire. That’s a very limited view and does not account for how much and when you will need to withdraw as you might not need to withdraw as soon as you retire.  When investing your 401k you should consider other factors such as:

• How much you’ve already saved
• Your pension or Social Security expectations
• Whether you have a spouse with income or benefits
• Your spending needs in retirement
• Your health and longevity risk
• Other sources of income (e.g. rental property)

A person retiring in 2035 who is already financially secure might consider being more aggressive by investing for the longer term and defer making withdrawals. A target date fund will automatically shift you to a more conservative portfolio and sacrifice long term appreciation potential.

2. Your Retirement Timeline May Change

A target date fund’s asset mix follows a “glide path”—a built-in schedule that gradually reduces stock exposure and increases bonds and cash-like assets as retirement approaches.

The problem is your target retirement date may change based on your financial situation, career and/or retirement goals.  By maintaining a dynamic 401k allocation, you can adjust your investment allocations based on your current retirement goals. 

Another problem is that glide paths vary widely across fund families.Two “2040” funds can have very different risk levels. One might hold 85% stocks ten years before retirement; another might be at 70%. At the retirement date itself, one fund may still hold 55%–60% stocks while another is closer to 40%.

There is no perfect glide path and most likely they do notmatch your personal situation.

3. Target Date Funds Often Don’t Account for Your “Total Portfolio”

Even if your 401(k) is your biggest account, most people also have other financial assets or exposures such as:

• A spouse’s retirement plan
• IRA or Roth IRA accounts
• Taxable brokerage accounts
• Stock options or RSUs
• Rental property or business investments

Target date funds manage only the slice of your wealth. If you already have a lot of stock exposure outside your 401(k), then a target date fund could push you into taking more equity risk than you realize. If you hold large bond positions elsewhere, the target date fund may make you overly conservative.

In other words, the fund may be reasonable in isolation yet mismatched to your overall household balance sheet.

Maximize Your Retirement

Target date funds are designed to be convenient, diversified, and easy to use. But that simplicity comes with trade-offs. Tailoring 401k allocations to your personal situation may give you the best chance to maximize your 401k plan and overall wealth. 

Using a financial advisor can help tailor your 401(k) investments to your retirement goals and integrate them into your broader overall net worth.

Disclosures