While regularly contributing to your 401(k) account is a smart move, understanding exactly what that money is going into is essential for a strong retirement plan. According to Vanguard’s 2026 How America Saves report, 61% of 401(k) plan participants had money in a single target-date fund last year. This isn’t surprising considering that these funds are the default option in many 401(k) accounts.
However, relying solely on target-date funds can be a financial mistake that hinders you from reaching your savings goal. Understanding their limits and alternatives can help you make a more informed investment decision.
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Why are target-date funds so popular?
Target-date funds are popular since they make investing easier. These are mutual funds that offer built-in diversification across different asset types and are designed to automatically rebalance over time.
Typically, they shift toward being more conservative (like being heavier in bonds than in stocks) as your retirement year approaches. Some funds also continue shifting for a certain number of years after your retirement to help manage growth.
As a saver, you benefit from not having to research individual investments and rebalance your portfolio on your own to manage risk over time. Instead, you consider your planned retirement year and select target-date funds close to that date. That makes them useful if you prefer a set-it-and-forget-it approach.
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How can they limit retirement savers?
Investing in target-date funds often makes sense as part of a diversified retirement portfolio. However, defaulting to this easy option may hurt the long-term growth of your savings. Not only do these investments offer less flexibility, but there are also concerns about fees, potential returns, and risk.
They take a one-size-fits-all approach
Not all retirement savers are the same. Maybe you’ve already built substantial savings outside of your 401(k) and have a higher tolerance for risk than the average saver. Or maybe your personal goals require a more cautious approach, where even target-date funds expose you to too much risk of loss.
The automated nature of target-date funds is a disadvantage here since they don’t account for your specific financial situation or risk tolerance. While you set your retirement year, you don’t have control over how the assets inside the funds are allocated. So, you might not get the growth or protection you want.
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Their returns might not seem impressive
Target-date funds take a “safer” approach with automatic rebalancing to manage risk. Returns typically decrease as you get closer to retirement and the allocation shifts toward more conservative options. While target-date funds optimize risk and returns relatively well, actual results vary across funds.
In a 2025 report, Morningstar reported a 7.3% average annualized return for a group of 37 target-date funds. This is a decent outcome for savers, but it might seem disappointing if you aim to beat the market. For example, Fidelity says the historical average S&P 500 stock market return is about 10%. If reaching your retirement goal requires a more aggressive return, you might need to diversify elsewhere.
You might lose money to high fees
Target-date funds usually charge an annual expense ratio that may include fees for the fund itself and underlying investments. This differs from buying individual stocks or bonds and even certain other mutual funds or ETFs.
The Investment Company Institute notes that the asset-weighted average expense ratio for these funds was 0.27% in 2025, though this figure can widely vary by fund. Although this fee might seem small, it can still cut into your return over many years, limiting the growth of your savings.
For example, if you have $100,000 sitting in your 401(k) for 10 years, the difference in growth even between a 7.3% return and a 7.03% return is around $5,000.
Which alternatives should you consider?
Depending on your financial situation and goals, target-date funds aren’t necessarily wrong, especially if you understand the trade-offs in terms of potential returns, risk, and flexibility. However, you might be willing to get more involved in investing if it would increase your chances of reaching your savings goal.
While your 401(k) options are limited to what your provider offers, relying solely on target-date funds often isn’t necessary. Various index funds, mutual funds, and even self-directed accounts may be available.
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Index funds
Vanguard says that stock and bond index funds, including domestic and international options, are common options in the 401(k) plans it offers. Like target-date funds, they include multiple underlying assets for built-in diversification. But they’re designed to perform in line with a specific index, like the S&P 500.
While you’d need to rebalance your own portfolio, you might benefit from lower fees than with target-date funds, and you wouldn’t need to manage individual bonds or stocks. Plus, risk and return potential would depend on the index’s performance, so research carefully.
Other mutual funds
If you prioritize higher returns, check whether your 401(k) plan offers mutual funds besides target-date funds. These are often actively managed, meaning a professional picks specific assets and makes adjustments to try to beat the market. While there’s no guarantee you’ll see better performance, you might prefer these funds if you tolerate more risk and don’t want to manage investments on your own.
However, the U.S. Securities and Exchange Commission cautions that active management can mean higher fees and taxes. So, always read the fund’s prospectus to understand potential costs and returns.
Self-directed accounts
Vanguard reported that 23% of its 401(k) plans gave participants access to self-directed brokerage options, though only 1% of participants took advantage.
If your plan offers this feature, you have much more flexibility over which investments you put your money in, similar to opening a brokerage account on your own. While selections vary, you may have options like ETFs, individual stocks and bonds, and various mutual funds. With careful research, you might find investments with acceptable risk and return potential and low costs.
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Bottom line
While having target-date funds in your portfolio isn’t always a mistake, consider your retirement goals and evaluate your 401(k) options today. Further diversifying with the alternatives discussed and working with a financial advisor are good steps that might help you be better prepared for retirement. Plus, check your 401(k) statements to see how your investments are performing and how much the fees are costing you.
Remember that your 401(k) is just one important piece of your retirement plan. Estimate your potential Social Security benefits and consider setting aside funds in other accounts with more flexibility, such as an IRA or taxable brokerage account.
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