401(k) Target Date Funds: What to Know and How to Pick the Right Allocation

If you've ever felt overwhelmed by the investment choices in your 401(k), you're not alone. Many plan participants face dozens of options, large-cap funds, small-cap funds, international stocks, bonds, and it can feel paralyzing.

That's where target date funds come in. They're designed to simplify retirement investing by automatically adjusting your portfolio's asset allocation as you age. But are they right for you? And if so, how do you choose the best one?

This guide will help you understand how target date funds work, when they make sense, and what to consider before selecting one for your 401(k).

What Is a Target Date Fund?

A target date fund (TDF) is a type of mutual fund that automatically shifts its asset allocation over time based on a specific retirement year. The fund's name typically includes a year, like "Target 2040" or "Target 2050", which corresponds to your expected retirement date.

How it works:

• When you're younger and retirement is decades away, the fund holds more stocks (higher growth potential, higher risk)

• As you approach retirement, the fund gradually shifts toward bonds and cash (lower risk, more stability)

• This automatic rebalancing is called the fund's glide path

Target date funds are often the default investment option in 401(k) plans, especially for participants who don't make an active investment choice.

The Glide Path: "To" Retirement vs. "Through" Retirement

One of the most important features of a target date fund is its glide path, the strategy that determines how and when the fund shifts from stocks to bonds.

There are two main approaches:

"To" Retirement Glide Path

The fund reaches its most conservative allocation at your retirement date and stays there. This approach assumes you'll move your money out of the fund when you retire.

"Through" Retirement Glide Path

The fund continues to adjust its allocation even after your retirement date, gradually becoming more conservative over time. This approach assumes you'll keep your money invested for income throughout retirement.

Why it matters: If you plan to keep your 401(k) invested in retirement, a "through" glide path may offer more growth potential and inflation protection. If you're planning to roll over to an IRA or annuity, a "to" glide path might be more appropriate.

Target Date Fund Asset Allocation by Age

Here's a general example of how a target date fund's allocation might shift over time:

• Age 30 (Target 2060 fund): 90% stocks, 10% bonds

• Age 45 (Target 2045 fund): 80% stocks, 20% bonds

• Age 55 (Target 2035 fund): 65% stocks, 35% bonds

• Age 65 (Target 2025 fund): 40% stocks, 60% bonds

• Age 75 (10 years past retirement): 30% stocks, 70% bonds

These percentages vary by fund family (Vanguard, Fidelity, T. Rowe Price, etc.), so it's important to review the specific allocation of any fund you're considering.

Advantages of Target Date Funds

Simplicity and Convenience

You choose one fund based on your retirement year, and it handles everything else. No need to monitor multiple funds or rebalance your portfolio.

Automatic Rebalancing

As markets fluctuate, the fund maintains its target allocation. This removes the emotional decision-making that can lead to buying high and selling low.

Professionally Managed

Target date funds are managed by investment professionals who make decisions about asset allocation, diversification, and rebalancing.

Diversification in One Fund

Most target date funds hold thousands of stocks and bonds across domestic and international markets, giving you broad exposure without the complexity.

Disadvantages and Limitations

One-Size-Fits-All Approach

Target date funds assume everyone retiring in the same year has the same risk tolerance, time horizon, and financial situation. That's rarely true.

Varying Asset Allocations Across Providers

A "Target 2040" fund from Vanguard may have a very different stock/bond mix than a "Target 2040" fund from Fidelity or T. Rowe Price. This can lead to significantly different performance and risk profiles.

Higher Expense Ratios (Sometimes)

While many target date funds have low fees, some, especially actively managed versions, can be more expensive than building your own portfolio with index funds.

Limited Flexibility

If your financial situation changes (early retirement, inheritance, or a second career), the fund's glide path may not align with your new timeline.

May Not Account for Other Assets

If you have investments outside your 401(k), like a taxable brokerage account or rental property, the target date fund doesn't "know" about them. Your overall portfolio might be more or less aggressive than intended.

How to Choose the Right Target Date Fund

Step 1: Select a Target Retirement Year

Choose a fund with a target date close to when you plan to retire. If you're 50 and planning to retire at 65, you'd look at a fund with a target date around 2040.

Tip: If you're planning to retire early or work longer than typical, adjust accordingly. For earlier retirement, choose a fund with an earlier date (more conservative). For later retirement, choose a later date (more aggressive).

Step 2: Review the Fund's Current Asset Allocation

Look at the fund's current mix of stocks and bonds. Does it match your risk tolerance?

If you're 55 and the fund is 85% stocks, ask yourself: Am I comfortable with that level of volatility this close to retirement?

Step 3: Understand the Glide Path

Check whether the fund uses a "to" or "through" retirement approach. If you plan to keep your money invested in retirement for income, a "through" glide path may be more appropriate.

Step 4: Compare Expense Ratios

Lower fees mean more of your money stays invested and compounds over time. Look for funds with expense ratios below 0.50%, and ideally closer to 0.10%–0.20%.

Index-based target date funds (like those from Vanguard or Fidelity) tend to have much lower fees than actively managed funds.

Step 5: Check the Underlying Holdings

Most target date funds are "funds of funds," meaning they invest in other mutual funds. Review what's inside to ensure you're comfortable with the level of diversification and investment strategy.

Target Date Funds vs. DIY Portfolio: Which Is Better?

Choose a Target Date Fund if:

• You want simplicity and don't want to manage your investments actively

• You're new to investing or feel overwhelmed by too many choices

• You prefer a hands-off, "set it and forget it" approach

• You don't have significant assets outside your 401(k)

Consider a DIY Portfolio if:

• You want more control over your asset allocation

• You have specific preferences (like avoiding certain sectors or emphasizing ESG investing)

• You're comfortable rebalancing your portfolio periodically

• You have other accounts and want to coordinate your overall allocation

There's no right or wrong answer. Some people prefer the simplicity of a target date fund, while others want the flexibility of building their own portfolio. Both can work well depending on your comfort level and goals.

When Target Date Funds Don't Make Sense

While target date funds are a solid default option for many people, they're not ideal for everyone.

Consider alternatives if:

• You plan to retire significantly earlier or later than the fund's target date

• You have a high risk tolerance and want a more aggressive allocation than the fund provides

• You're managing multiple retirement accounts and want more precise control over your overall asset allocation

• You have strong preferences about investment types (e.g., socially responsible investing, avoiding international stocks)

• You're willing to actively manage and rebalance your portfolio

Actively Managed vs. Index-Based Target Date Funds

Target date funds come in two main types:

Index-Based (Passive)

These funds invest in low-cost index funds that track market benchmarks. They typically have lower fees and are designed to match market returns.

Examples: Vanguard Target Retirement Funds, Fidelity Freedom Index Funds

Actively Managed

These funds employ professional managers who try to beat the market through stock selection and tactical allocation changes. They typically have higher fees.

Examples: T. Rowe Price Retirement Funds, American Funds Target Date Retirement Series

Which is better? Research consistently shows that low-cost index funds outperform most actively managed funds over the long term, largely due to their lower fees. For most investors, index-based target date funds are the better choice.

Frequently Asked Questions

How do I know which target date fund to choose in my 401(k)? Choose a fund with a target date closest to when you plan to retire. If you're 45 and plan to retire at 65, a 2045 fund would be appropriate. Review the allocation to ensure it matches your risk tolerance.

Can I change my target date fund if my retirement plans change? Yes. If you decide to retire earlier or later, you can typically switch to a different target date fund within your 401(k) without tax consequences.

What's the difference between a "to" and "through" retirement fund? A "to" fund reaches its most conservative allocation at retirement and stays there. A "through" fund continues adjusting after retirement, becoming more conservative gradually. "Through" funds are better if you'll keep money invested throughout retirement.

Are target date funds good for early retirees? It depends. If you're retiring at 50 but the fund is designed for age 65 retirement, it may be too aggressive for your timeline. Consider choosing a fund with an earlier target date.

Do I need to rebalance a target date fund? No. The fund automatically rebalances to maintain its target allocation and adjusts over time according to its glide path.

What if I have multiple retirement accounts? If you have a 401(k), IRA, and taxable brokerage account, a target date fund in your 401(k) alone might not give you the right overall allocation. You may want to coordinate across all accounts or build a custom portfolio instead.

Final Thoughts

Target date funds offer a simple, hands-off way to invest for retirement. They're particularly useful if you're just getting started, feel overwhelmed by investment choices, or simply prefer a "set it and forget it" approach.

But they're not perfect for everyone. Understanding how they work, especially the glide path, expense ratios, and underlying allocations, can help you decide if a target date fund is right for you, or if a custom portfolio might serve you better.

At Life Story Financial, we help clients evaluate their 401(k) options and build investment strategies that align with their goals, timeline, and risk tolerance. If you'd like help reviewing your retirement plan, we're here to support you.