Target-date funds are 'a flawed tool.' Here's how you can do better.

By Venessa Wong

Your 401(k) is probably in a target-date fund. This simple hack may help you earn more.

Target-date funds provide a simple, hands-off approach to investing for retirement. What people should avoid, according to one financial adviser, is putting money into a target-date fund at age 22 and not thinking about it for the next 40 years.

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To Jesse Cramer, target-date funds, which automatically rebalance to gradually become more conservative as the account holder's planned year of retirement - the fund's "target date" - approaches, are a well-meaning but flawed tool for the growing number of investors who are using them.

"If you have to park your money" for a period of time in a low-cost, passively managed target-date fund "while you get more confident and learn about how to invest, to me, that is a great outcome," Cramer said.

What people should avoid, however, is putting money into a target-date fund at age 22 and not thinking about it "for the next 40 years," the financial adviser and host of the "Personal Finance for Long-Term Investors" podcast told MarketWatch.

But that is exactly how target-date retirement funds are intended to work, and that's supposed to be the attraction: The investor makes one choice - the year they will retire - and then sets it and forgets it. Target-date funds provide an option for people who do not wish to actively manage their retirement account, who have little knowledge of finance or who may struggle to invest for retirement at all. They also are often the default option when employers automatically enroll workers into a 401(k).

The simplicity has proved very appealing. There was $4.8 trillion in target-date assets in 2025, up 20% year over year, according to Morningstar. Large players in the target-date retirement market include Vanguard, Fidelity and Capital Group.

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Investing for retirement is a challenge for many Americans: About 44.1% of people with full-time jobs (excluding government and self-employed workers) do not participate in their employer's retirement plan, according to an analysis of U.S. Census data. Among those who do participate, many wish they had more guidance on how to invest their retirement assets. So when offered the option of a target-date fund, 84% of participants use it, according to Vanguard data.

Research has shown that when a target-date fund is the default investment option, younger enrollees have a higher share invested in stocks compared with those who did not have a target-date option, according to a report by MIT Sloan.

Despite these advances, some financial professionals say target-date funds could still do better. Even as the funds have shifted over the years to include a larger share of stocks, target-date "glide paths" - or the rate at which the fund rebalances - add bonds into the mix way too soon, they argue, forgoing too much stock-market growth when investors are still decades away from retiring and when returns on bonds have been low. This can lead to a shortfall in a longer retirement, particularly as life expectancy in the U.S. reached a record high of 79 years in 2024.

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Vanguard's target-date fund for those planning to retire in 2040, for instance, already has 25% in bonds and is designed to gradually ramp up to 50% by age 65 and to 70% by age 72.

This strategy is supposed to balance risks such as market volatility, longevity and inflation over a long period of time.

"Maintaining meaningful equity exposure near and into retirement helps address longevity risk and supports long-term purchasing power, while the final landing point is aligned with the period when investors are typically drawing down assets to fund retirement spending," Brian Miller, Vanguard's head of multi-asset product management, told MarketWatch.

To adjust to changing needs and offer more growth potential, many target-date funds have gradually increased their equity allocation over the last decade, according to Morningstar, with the median equity exposure for people 45 years from retirement at 93% in 2025, up from 89% a decade earlier.

Fidelity recently updated its glide path to have higher equity exposure for both early-career investors and those already in retirement. "Fidelity's target-date investment team believes that higher equity exposure has potential to improve the portfolios' ability to support income in retirement. In addition, increased exposure to inflation-sensitive assets [like Treasury inflation-protected securities] may improve portfolio resiliency during inflationary environments," a spokesperson told MarketWatch.

Cramer, who is 36, still sees this glide path as potentially too conservative. "I'm pretty comfortable putting a lot of money in the stock market" until retirement is about 10 to 15 years away, he told MarketWatch.

Some target-date funds also have high fees, as Cramer talked about in a recent episode of his show. While expense ratios for these funds have declined by half in the past decade, according to Morningstar, they still average 0.27%. Vanguard's target-date retirement funds, which lead the industry, charge 0.08%, which is an acceptable rate, he said, but others charge much more.

If the fee is above 0.15%, "at least ask the question of what's going on," he said. "Once you get into 40, 50, 60 basis points, that's where you just say, 'OK, this is high. Why is this high?'"

"Target-date funds really come down to simplicity versus optimization," Michael Bogardus, a financial planner at Barnum Financial Group, told MarketWatch. "They solve a real problem by giving people a diversified portfolio that automatically adjusts risk tolerance over time, but that convenience often comes with lower long-term growth potential."

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A simple workaround

For those who feel the fund for their retirement year may not sufficiently capture stock-market gains, there is a simple workaround. J.L. Collins, author of "The Simple Path to Wealth," wrote this on his blog: "If you want more aggressive (greater percentage of stocks), just pick a later date." For instance, if you plan to retire in 2040, select a fund for a later year, making sure that the glide path aligns with your preferences.

"If you want a more conservative (greater percentage of bonds) approach," he wrote, "choose a date before your actual retirement. The earlier the date the more conservative the asset allocation."

Collins recommended target-date retirement funds, calling them in his post "an excellent choice for many, maybe most people," but he noted that he still has "a slight preference" for the "simple" strategy of holding Vanguard's Total Stock Market Index VTSAX and adding bonds (specifically, Vanguard's Total Bond Market Index Fund ) when a person retires and starts living off their investments.

Manage your own retirement portfolio

With some clear guidelines and a little extra effort, some experts say it's possible for 401(k) investors to do better than target-date retirement funds and potentially retire with more money. If their plan allows, they can choose their own investments instead, focusing on lower-cost options and a more stock-heavy mix, increasing bond exposure only when they are close to retirement. Trading within tax-advantaged retirement accounts like 401(k)s and IRAs doesn't incur capital-gains taxes, so swapping out one investment for another can be done easily.

Doing this, however, does require a clear understanding of your financial needs and your risk tolerance. Someone who needs to catch up on retirement savings, for example, may need to stay aggressively invested as long as possible to grow their nest egg faster, Cramer said, while a person who is expecting a windfall may want to keep their retirement portfolio in stocks but invest that windfall more conservatively if those funds will be used first.

Cramer invested his 401(k) into three funds: a total U.S. stock index fund (50%), a total international index fund (40%) and a total U.S. bond index fund (10%).

Although he is not close to retiring, Cramer still does not want 100% exposure to stocks, and his allocation is actually not dramatically different from target-date funds for people his age. The difference is that he will only start ramping up bond exposure 10 to 15 years before retiring. By comparison, he said, "the average target-date fund will start gliding your money down [to hold more bonds] over 25 years."

Target-date retirement funds are a reasonable default, Bogardus said, but they "can also cause investors to miss opportunities to personalize their strategy around their specific income needs as retirement approaches." An investor's aim is for a portfolio to "generate the growth and income needed to support someone for the rest of their life," but each person's path to getting there will be different. "That is well beyond what a target-date fund is designed to do," he said.

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-Venessa Wong

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