Enrich Finance

You've probably heard it from a friend or colleague: "Just put your retirement money in a target date fund. It's easy." They're not wrong. Target date funds (TDFs) are incredibly popular for a reason. They offer a simple, hands-off approach to investing that appeals to people who have better things to do than stare at stock tickers.

But here's the thing: easy isn't necessarily optimal. While TDFs can be a great starting point, they are a one-size-fits-all solution in a world where your financial life is unique. You have your own goals, your own tolerance for risk, and your own timeline. This article will give you a straight-up look at target date funds—what's good, what's bad, and why you, as a savvy investor, might be better off taking the wheel yourself.

What exactly are target date funds?

A target date fund is an investment fund designed to grow your assets over a specific period, right up until a target retirement year. For example, if you plan to retire around the year 2055, you might invest in a "Target Date 2055" fund.

Here's how they work:

Automatic asset allocation: When you're young and far from retirement, the fund holds more stocks (equities) for higher growth potential. As you get closer to your target date, the fund automatically shifts its holdings towards more conservative investments, like bonds, to protect your capital.
The "glide path": This automatic shift from aggressive to conservative is known as the fund's "glide path." It's designed to reduce risk as your retirement date nears.
Diversification in one package: A single TDF gives you exposure to a mix of U.S. stocks, international stocks, and bonds, so you're diversified without having to buy dozens of different funds.

The main appeal is clear: simplicity. You pick a fund based on your expected retirement year and let it run on autopilot. For many, this "set it and forget it" approach is a major selling point.

The rise target date funds: by the numbers

To understand the magnitude of target date funds' influence, consider that these investment vehicles now manage over $4 trillion in assets as of 2024 (source), representing one of the most significant financial innovations for American retirement savers in recent decades. According to Vanguard's research, 83% of participants use target date funds when they are offered, and 58% of participants hold a single target date fund as their entire retirement allocation. The dominance is striking: 98% of qualified default investment alternatives (QDIAs) designated by plan sponsors are target date funds. This means that when employees are automatically enrolled in their company's 401(k) plan and don't make an active investment choice, they are typically placed into a target date fund. Fee compression has been a notable trend, with the asset-weighted average expense ratio for target date funds dropping to 0.29% in 2024, down from 0.46% five years earlier and half of what it was in 2009. This cost reduction has been driven by increased flows to passive target date strategies, which now control 61% of target date assets compared to 29% for actively managed strategies.

The case for target date funds: why they're a decent option

TDFs aren't a bad product. For many people, they are a significant improvement over doing nothing or making uneducated investment choices. Studies have shown that participants in 401(k) plans who invest in TDFs often have better-diversified portfolios than those who construct their own.

Research published in academic journals has found that target date funds can serve as effective default options, with participants who use them showing improved retirement readiness compared to those who self-direct their investments poorly. The behavioral aspect cannot be understated—target date funds harness investors' natural tendency toward inertia in a positive way.

Key benefits include:

Simplicity and convenience: They remove the complexity of building and managing a portfolio. This is a huge advantage for people with little time or interest in active investing. According to Vanguard's data, only 12% of participants did any trading at all in 2022, highlighting how most investors benefit from a hands-off approach.
Professional management: The fund is managed by professionals who handle the rebalancing and asset allocation for you. This includes tactical adjustments based on market conditions and ongoing glide path management.
Built-in diversification: They prevent common mistakes like concentrating too much of your portfolio in one company's stock or avoiding international markets. Target date funds typically include domestic and international equity exposure as well as fixed income components.
Automatic rebalancing: Target date funds continuously rebalance back to their target allocation, something many individual investors struggle to do consistently, especially during periods of market stress when rebalancing can be psychologically difficult.
Cost-effective advice: Target date funds provide an element of investment advice at a relatively low cost. Unlike many managed account services that can charge additional fees, most target date funds don't levy an additional management fee beyond their underlying fund expenses.

If you are just starting out or genuinely want a completely hands-off investment, a TDF could be a reasonable choice. It ensures your retirement savings are diversified and adjusted over time, which is far better than letting cash sit idle or making reactive investment decisions during market volatility.

The case against target date funds: why one-size-fits-none

Now for the reality check. While TDFs are convenient, that convenience comes at the cost of personalization. You're a high-earning professional with a growing family and specific wealth-building goals. A generic product might not be the right tool for the job.

Here are the main drawbacks:

Lack of personalization: TDFs only know one thing about you: your age. They don't account for your specific risk tolerance, your income, other investments you hold, or your unique financial goals (like buying a second home, funding a child's education, or retiring early). Everyone in a 2055 fund gets the same allocation, regardless of their individual circumstances. While you can just choose a different date (2065 for more aggressive and 2045 for more conservative), it still doesn’t take into account your goals or the rest of your portfolio.

Recent research from T. Rowe Price, conducted in partnership with MIT's Sloan School of Management and Stanford University, shows that while younger investors tend to have similar savings patterns and risk appetites, older investors display a broader range of asset allocation choices and investment goals. This diversity is reflected in both their investment behavior and the dispersion of retirement assets. The research concludes that "preferred asset allocations and financial circumstances become more diverse with age," suggesting that "personalized retirement solutions could meet the needs of older participants."

Generic glide paths: The glide path is predetermined and rigid. But what if market conditions change drastically? What if your personal financial situation changes? A TDF's glide path won't adapt to your life. Research from institutions like the Employee Benefit Research Institute (EBRI) has highlighted the wide variation in glide paths among different TDF providers, showing there's no single "correct" approach.
Lack of transparency: The variation between TDFs is substantial. In a study by Voya, when comparing target date fund vintages five years from retirement, the most aggressive TDF glide path maintains a 55% equity allocation, while the most conservative has only a 25% allocation—a difference of 30 percentage points. This dispersion in approaches reflects different philosophies about balancing growth potential against volatility as investors approach retirement.

Taking control: why DIY asset allocation is worth it

Given the limitations of target date funds, you should consider taking a more active role in your investment strategy. Building your own portfolio through DIY asset allocation allows you to create a strategy that is perfectly aligned with your financial life.

The personalization advantage

Modern investment research supports the value of personalization. A study published in the Financial Planning Review examining over 8,000 net worth optimizations found that after controlling for an investor's risk tolerance, the optimal amount of equity exposure for tradable financial assets increased with the relative strength of the investor's overall economic balance sheet.

This "net worth optimization" approach considers both your attitude toward risk (risk tolerance) and your financial ability to bear risk (risk capacity) simultaneously. The research shows that as your holistic economic balance sheet strengthens—considering factors like human capital, other assets, and liabilities—it becomes optimal to take on more risk in your investment portfolio.

Beyond the single glide path

Rather than following a predetermined glide path based solely on age, you can implement multiple "glide paths" for different goals:

Growth-oriented assets for long-term goals like retirement, where you have 15+ years and can weather market volatility.
Moderate risk assets for medium-term goals like a home purchase in 5-10 years, where you need some growth but also want to limit downside risk.
Conservative assets for short-term goals and emergency funds, where capital preservation is paramount.

This approach empowers you to:

Tailor your risk level: You can build a portfolio that matches your true comfort level with risk, not one assigned to you based on your age.
Integrate all your assets: You can make decisions that account for your entire financial picture, including your 401(k), brokerage accounts, real estate, RSUs, and other assets.
Optimize for your goals: Your portfolio can be designed to support specific milestones, not just a generic retirement date.
Lower Your Costs: By selecting low-cost index funds and ETFs, you can minimize fees and maximize your long-term growth.

The asset location advantage

On top of all these advantages of a personalized approach, the one area where personalized approaches can significantly outperform target date funds is in tax optimization through asset location strategies. Asset location involves strategically placing different types of investments in different types of accounts (taxable, tax-deferred, or tax-exempt) to minimize your overall tax burden.

Research shows that proper asset location can add significant value. For example, a portfolio evenly split between stocks and bonds could see tax-advantages by placing all stocks in tax-advantaged accounts and all bonds in taxable accounts, compared to maintaining the same 50/50 allocation in each account type.

Learn more about how to implement these tax-efficient strategies here.

Target date funds, by their nature, cannot implement asset location strategies since they provide the same allocation regardless of account type.

Addressing complex situations

Personalized asset allocation becomes particularly valuable when you have complex financial situations that target date funds cannot address:

RSU and company stock concentration

If you receive restricted stock units or own company stock through an employee stock purchase plan, you may have significant concentration in your employer or sector, creating both financial and career risk.

A personalized approach allows you to:

Quantify your total exposure to your company and sector
Implement diversification strategies in your other accounts to offset this concentration
Plan for systematic selling of RSUs to rebalance your overall allocation
Consider hedging strategies if you cannot immediately diversify

Multi-account coordination

Many investors have retirement assets spread across multiple accounts: current employer 401(k), previous employer 401(k)s, traditional and Roth IRAs, and taxable investment accounts. Each account may have different investment options, fees, and tax treatment.

A coordinated approach allows you to:

Treat all accounts as components of a single portfolio
Optimize which assets go in which accounts for tax efficiency
Take advantage of the best investment options available across all platforms
Manage required minimum distributions more effectively

Multiple time horizon management

Unlike target date funds that assume a single retirement timeline, personalized asset allocation can accommodate multiple goals with different risk profiles:

College Funding: For children's education expenses, you might implement a separate glide path that becomes more conservative as college approaches, regardless of your retirement timeline.
Home Purchase: For a down payment goal, you might maintain a separate allocation focused on capital preservation and moderate growth over a 3-7 year period.
Early Retirement: If you're planning financial independence before traditional retirement age, you might maintain a more aggressive allocation longer than a target date fund would suggest.

A framework for decision-making

Given the complexity of these considerations, how should you decide whether to stick with target date funds or move toward a personalized approach? Here's a framework to guide your decision:

Consider target date funds if you:

Have limited time or interest in managing investments and prefer a completely hands-off approach.
Are early in your career with simple financial situations and standard retirement timeline goals.
Have limited assets where the benefits of personalization don't justify the additional complexity.
Lack access to professional guidance and don't have the knowledge to implement more sophisticated strategies.
Value simplicity above optimization and are satisfied with market-average outcomes.

Consider personalized asset allocation if you:

Value tax efficiency and want to optimize your after-tax returns.
Pursue multiple financial goals with different timelines beyond just retirement.
Have complex financial situations including RSUs, multiple retirement accounts, real estate investments, or business ownership.
Have strong views on risk management that don't align with age-based assumptions.
Have sufficient assets where small improvements in returns have meaningful dollar impacts.
Are interested in investment management and willing to spend time on portfolio oversight.

Target date funds serve a purpose. They provide a simple, automated solution for people who prefer not to engage with their investments. But you may not be that person. If you're building significant wealth and have clear financial goals, a one-size-fits-all product may represent a compromise you don't need to make.

The research is clear: while a TDF might be fine for now, as you age and accumulate wealth, their financial situations become more diverse and complex. Target date funds, with their single-variable approach based on age alone, may not address this complexity effectively. They cannot account for your RSUs, your real estate holdings, your multiple time horizons, your tax situation, or your evolving risk capacity. By understanding the principles of asset allocation and taking control of your own portfolio, you can create a financial strategy that is tailored to your unique circumstances. You can build a portfolio that reflects your actual risk tolerance and capacity, aligns with your multiple goals, operates more tax-efficiently, and adapts to your changing life circumstances.

The choice is yours: accept the convenience of a generic solution or invest the time and effort to build a portfolio that considers your unique situation. Given your financial goals and sophistication, the path toward personalized asset allocation represents not just an investment decision, but a commitment to optimizing your long-term financial success.