If you have a 401(k), you may be invested in a target-date fund (TDF) or have one as an investment option.
TDFs are professionally managed funds that invest in a variety of assets such as stocks and bonds, so they offer instant diversification. These funds may be appealing to “set it and forget it” investors who'd rather hand off investment decisions to the professionals. It’s like putting your retirement savings on autopilot. But TDFs do have their downsides, so it’s important to understand these investments before devoting yourself to one.
What Is a TDF, and How Does It Work?
TDFs are designed to shift their asset allocations or mix of the assets they invest in to become more conservative as you get closer to retirement. This is why TDFs are named after years or their target date. For example, the Fidelity Freedom Index 2045 is designed for people who expect to retire in or around 2045. As you approach that year, the TDF would shift its asset allocation. So if you started investing in a stock-heavy TDF today, its asset allocation may be more concentrated in generally less risky fixed-income investments such as bonds when you reach the target date.The idea here is that as you get closer to retirement, it may be more important to preserve the assets you’ve accumulated.
But this doesn’t mean it’ll completely abandon stocks, as most TDFs also aim for growth.
Can You Invest in a TDF Outside a 401(k)?
The TDF has become a hallmark of 401(k) plans. In fact, 92 percent of TDF assets are held in retirement accounts, according to the Investment Company Institute (ICI).Existing regulations have also made it simpler for plan administrators to auto-enroll employees into TDFs within their 401(k) plans at a default contribution rate of about 3 percent.
The Secure 2.0 Act has also made it easier for more employees to enroll in their company’s 401(k) plans. But it’s possible to invest in a TDF if you don’t have a 401(k). Still, it’s crucial that you do your due diligence when evaluating TDFs on the open market. Plan administrators are legally required to carefully evaluate and select the funds and investment options within 401(k) plans. Outside of the plan, this would be up to you, so it’s important to pay close attention to fees or expense ratios. You may also want to take a look at the funds that TDFs invest in and evaluate those. You can also make sure that you are comfortable with the TDF’s glide path. This is the course it will take over time and it shows you how its asset allocation would change as you get closer to the target date.
Top TDFs
Here are some of the top TDFs with low fees:- Vanguard Target Retirement 2045 Fund Investor Shares
- Fidelity Freedom Index 2045 Fund Investor Class
- Nuveen Lifecycle Index 2045 Fund Premier Class
- American Funds 2045 Target Date Retirement Fund Class R-5
Disadvantages of TDFs
A TDF can be a solid retirement investment for the hands-off investor. But as with all securities, TDFs have their risks.
For instance, you may find that the TDF is too invested in fixed-income securities by the time you reach the target date. Or you may reach the target date and find that you still need more time to save and remain in the workforce. With that said, a TDF may be best for the investor who can predict the proper retirement year and have an estimate of how much they’d need to live comfortably in retirement.
Let’s say you expect to need $40,000 a year. If you invest $2,400 a year (3 percent of an $80,000 salary) for 45 years, then you could accumulate $2,214,188.25 by the end of that time frame. This assumes a 10 percent return, which is the historical average return of the S&P 500 Index, comprising the nation’s biggest companies. It’s also important to note that many TDFs invest in funds that track the S&P 500 or other indexes. These are also known as index funds. But there are exchange-traded funds (ETFs) that work similarly.
Should I Invest in Multiple TDFs?
Many financial advisers recommend that you stick to one TDF if you plan on investing in one for retirement. Most advise you to pick one named after the year you expect to retire. By design, TDFs offer instant diversification. As a fund of funds, it works as its own portfolio, and its asset allocation is updated by its managers. So for the right investor, a TDF could provide some peace of mind.But this doesn’t mean you don’t have other options. You can build your own portfolio starting with an asset-allocation calculator online. This would help you determine how to break down your asset mix based on your individual goals and circumstances. From there, you can choose a blend of stocks and bonds or ETFs and index funds.
You can also go with a robo-adviser. These are algorithm-based platforms that recommend a diversified portfolio depending on your specific financial situation and investing goals. Many robo-advisers also automatically rebalance your portfolio. This can be another solid option for the hands-off investor. Robo-adviser platforms also allow you to open individual retirement accounts (IRAs) and Roth IRAs. So they offer all the bells and whistles that come with these types of tax-advantaged retirement accounts but with a touch of automation.
The Bottom Line
TDFs can help hands-off investors save for retirement. They stand out for instant diversification, low fees, and the fact that they are designed to automatically change asset allocation as you near retirement in an attempt to capture growth and mitigate risk. But they may end up being too heavily invested in fixed-income securities designed for preservation when you finally reach retirement. So if you’re more of an active investor and want complete control, you can open an IRA or Roth IRA and invest in your desired mix of stocks, bonds, mutual funds, and ETFs. You can also open either account through a robo-adviser if you’re a tech-first investor.The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
