Why Target Date Funds Miss the Mark
Despite the popularity of target date funds, investors should dig deeper when choosing these easy-to-use retirement savings options.


Over the last decade, target date funds have increased in popularity among investors. Target date funds are especially prevalent within 401(k) plans, as they are often promoted to participants as a “set it and forget it” investment solution. According to the Investment Company Institute 2020 Fact Book, nearly $1.5 trillion is now invested in target date funds, the vast majority within 401(k) plans.
For those unfamiliar with target date funds, the fund automatically rebalances the asset mix for a predetermined time frame. Investors typically pick a target date that coincides with their anticipated date of retirement, with the fund reducing equity exposure the closer one gets to retirement. The appeal of target date funds is that they help simplify the complex. The portfolio rebalancing responsibility belongs to the fund manager, with no action required by the investor.
Most investors would probably expect target date funds with the same target date to have roughly the same asset mix, but our experience shows funds with the same target date can have significantly different asset allocations.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Let’s look at four target date funds with the same target retirement date of 2025 from four large mutual fund companies (all data below is as of 12/31/20):
Header Cell - Column 0 | T. Rowe Price Retirement 2025 Fund | Vanguard Target Retirement 2025 Fund | Fidelity Managed Retirement 2025 Fund | Dimensional 2025 Target Date Retirement Income Fund |
---|---|---|---|---|
Row 0 - Cell 0 | Ticker: TRRHX | Ticker: VTTVX | Ticker: FIXRX | Ticker: DRIUX |
Asset Allocation | 70% equity / 30% fixed | 60% equity / 40% fixed | 47% equity / 53% fixed | 35% equity / 65% fixed |
2020 annual return | 14.7% | 13.3% | 13.1% | 17.5% |
As you can see, the asset allocations vary significantly, even though each fund has the same stated target date.
Here are several takeaways for investors using target date funds:
- Be sure to look under the hood: Investors should explore the asset allocation of the fund. We prefer target date funds that incorporate international and emerging market equity exposure as well as U.S. equities.
- Expenses matter: Expenses are a direct reduction in return; the average target date fund’s expense ratio is 0.62%, according to ICI. Look for funds with expenses below the average.
- Don’t be too conservative: The old rule of thumb for asset allocation was subtract your age from 100 and that would be your equity allocation. But consider that for a married 65-year-old couple retiring in 2021, the probability that at least one person will live to age 95 is 50%. The rule of thumb may well be too conservative for maintaining purchasing power over a nearly 30-year retirement period.
Target date funds can be a valuable tool for investors, but remember, even funds that help simplify investing require due diligence and monitoring.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Mike Palmer has over 25 years of experience helping successful people make smart decisions about money. He is a graduate of the University of North Carolina at Chapel Hill and is a CERTIFIED FINANCIAL PLANNER™ professional. Mr. Palmer is a member of several professional organizations, including the National Association of Personal Financial Advisors (NAPFA) and past member of the TIAA-CREF Board of Advisors.
-
Planning a Major Home Renovation? 3 Smart Ways to Finance It
From HELOCs to personal loans, here’s how to pay for a major home renovation without draining your savings.
-
Six Warren Buffett Quotes Every Retiree Should Live By
The 'Oracle of Omaha' knows a thing or two about life, investing and retirement.
-
Budget Hacks Won't Cut It: These Five Strategies From a Financial Planner Can Help Build Significant Wealth
Cutting out your daily latte might make you feel virtuous, but tracking pennies won't pay off. Here are some strategies that can actually build wealth.
-
To Unwrap a Budget-Friendly Holiday, Consider These Smart Moves From a Financial Professional
You can avoid a 'holiday hangover' of debt by setting a realistic budget, making a detailed list, considering alternative gifts, starting to save now and more.
-
Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track Record
Homeowners who are considering using home equity in their retirement plan can analyze it like they do their other investments. Here's how.
-
Why Does It Take Insurers So Darn Long to Pay Claims? An Insurance Expert Explains
The process of verification, investigation and cost assessment after a loss is complex and goes beyond simply cutting a check.
-
Two Reasons to Consider Deferred Compensation in the Wake of the OBBB, From a Financial Planner
Deferred compensation plans let you potentially lower your current taxes and help to keep you out of a higher tax bracket. It's important to consider the risks.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)
Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
The End of 2%? An Investment Adviser's Case for Why the Fed Should Raise Its Inflation Target
Yes, inflation can be tough on those living on fixed incomes, but protecting us from it too strictly could do our overall economy more harm than good.
-
Medicare Open Enrollment: Why You Need to Pay Extra Attention to Part D, From a Financial Adviser
The lowest premium for prescription drug coverage might not actually save you the most money. Make sure you take copays into consideration and do the math.