If you have a 401(k), chances are you’re invested in a target date fund, one of those all-in-one options that automatically adjusts its mix of stocks and bonds as you approach retirement.
They’re not a bad idea. For many savers, especially early in their careers, target date funds solve the biggest problem of all: inaction. You pick the fund that matches your retirement year, and it does the rest. It’s diversification and discipline in one tidy package.
But convenience comes with a cost.
The average target date fund carries an expense ratio of about 0.29%, which is two to five times higher than a comparable ETF-based portfolio. That may not sound like much, but over a career, the drag compounds and could reduce your retirement nest egg by thousands of dollars. And because these funds often rely on a single provider’s underlying products, you may also be paying indirectly for active management or higher-cost holdings.
The real issue, though, isn’t cost, but relevance. As you build wealth and your financial picture becomes more complex, a one-size-fits-many glide path starts to miss the mark. Target date funds don’t account for things like outside assets, company stock, or taxable savings. They can’t coordinate risk across accounts, manage tax efficiency, or tailor your mix to your actual retirement plans.
In fact, target date funds can become less useful with age. Later in life, their “conservative” allocations are often little more than a handful of bond and large-cap funds—simple portfolios that still charge a hefty fee. And because they’re managed as discrete portfolios, your 401(k) may end up working in isolation from the rest of your investments, creating redundancy and inefficiency.
For most people, a 401(k) will be the cornerstone of retirement. It deserves more than autopilot. A careful review can help ensure your investments—inside and outside your plan—are aligned, efficient, and truly working together toward your goals.