top of page

target date funds graph

The Basics of Target Date Funds

If you have a retirement plan through work (401(k), 403(b), etc) and are putting money into it, it’s very likely that you currently have money in a target date fund or have at least seen them on your list of fund options. More often than not when doing the initial enrollment through your HR department or online, the default selection is to put everything into a target date fund that corresponds with your anticipated retirement age. Sounds pretty good right? When do I turn 65? Great, put everything into the target fund that most closely matches that age. These options have become increasingly popular. According to CNBC, it is estimated that $1.8 trillion dollars are currently invested in target date funds, and 80% of all 401k participants are in these funds. But is that really the best way to invest? First let’s break down what exactly these investments are made of.

What is a Target Date Fund made of?

A target date fund is like an onion, layers on layers of investments underneath the surface. When you put your money into a target date fund you get a little bit of everything. The breakdown of a 2040 fund from one of the largest investment providers looks like this, and keep in mind this is for someone retiring in 18 years.

  • 45% US stock

  • 42% International stock

  • 10% bonds and 2.38% cash.

Performance of Target Date Funds vs All Index Portfolio

Diversification is a good thing and this is diversified. But how does this compare to other types of portfolios such as one that Dave Ramsey would recommend? Well, as you probably know, the market has had a bad year, currently, the S&P 500 is down 17.55% YTD. So, what did this target date fund do? It is down 17.56% YTD. The 10% exposure to bonds is part of the portfolio for downside protection and even with that, it has underperformed an all-stock portfolio. Given the underperformance in the International markets, it is easy to see why there would be some variation in return. So, I decided to compare the target date fund with an all-index portfolio 25% growth, 25% growth and income, 25% aggressive growth, and 25% international. I used all index options for each category. The results in the chart attached to this article show an initial investment of $10,000 into each option 10 years ago.

The blue line that says ‘benchmark’ represents the specific target date fund that I referred to previously and red line that says ‘portfolio’ represents the all-index portfolio also mentioned previously.

The difference in returns over the last 10 years was 11.5% for the all-index portfolio vs 9.08% for the Target Date fund. In final market value terms $29,716 for the all-index portfolio and $23,856 for the target date fund.

Target date funds have another quality that makes them a unique product. These prebuilt investment vehicles make no attempt to conform to the risk tolerance of the individual investor. Some investors have no problem with market volatility, others lose sleep over market downturns. Unfortunately, if you are in a target date fund, you don’t have the option to remove or add risk to the portfolio. You get what is packaged into the specific fund that you choose. Having a portfolio that matches your risk tolerance can have a huge impact on reaching your retirement goals. It prevents investors from jumping ship when markets get volatile.

What are Target Date funds good for? Can your Advisor manage your 401(k)?

To clarify, I do not hate target date funds. They are a great way to set it and forget it. If you do not have the expertise and/or the desire to research and rebalance your portfolio on an ongoing basis, they do all of that for you. Studies have shown that individuals who use target date funds outperform those who try to do it themselves over time on average. However, If you are interested in making changes to your 401(k) portfolio and find it to be overwhelming, the Financial Advisors at Whitaker-Myers Wealth Managers can help. We offer 401(k) management where we can look at what options you have available in your 401(k) and help you make informed investment decisions that match your risk tolerance and goals. For most individuals, the 401(k) is their primary investment vehicle, which means how you are invested can make or break your retirement. If you have any questions about your 401(k) investment options, please reach out to your advisor today.


September 2, 2022

Jake Buckwalter

Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm.  The information presented is for educational purposes only and intended for a broad audience.  The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed.  Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner. 

Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. 

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

Understanding Net Unrealized Appreciation (NUA) in Retirement Plan Rollovers


Understanding Net Unrealized Appreciation (NUA) in Retirement Plan Rollovers

Monthly College Planning Update: September 2023


Monthly College Planning Update: September 2023

The Market Based Argument for Dave Ramsey's Four Categories


The Market Based Argument for Dave Ramsey's Four Categories
bottom of page