Target-Date Funds in Your 401(k): When They Help and When They Cost You

A target-date fund inside your 401(k) is more like a pre-cooked frozen meal than an investment portfolio. Convenient, edible, designed for the average eater. But you don’t know exactly what’s in it until you read the label, and the price per ounce ranges wildly depending on the brand. Most people grab the one with their retirement year stamped on the box and never check the ingredients again.

That default behavior is why target-date fund assets just crossed $4.8 trillion in 2025, up 20.3% in a single year, according to Morningstar’s 2026 Target-Date Fund Landscape report. The vehicle works. The problem is that two funds with the same year on the cover can cost you wildly different amounts and hold wildly different risk levels. If you’re going to let one fund run your retirement on autopilot, you owe yourself 20 minutes with the prospectus before defaulting in.

What exactly is a target-date fund doing for you?

The pitch is simple: pick the year closest to your expected retirement, contribute, and the fund automatically shifts from stock-heavy to bond-heavy as you age. The mechanism behind that shift is called a glide path, and it’s the single most important feature most investors never look at. Here are the basics worth knowing before you keep contributing:

Five things every 401(k) participant should check on their target-date fund:

• Expense ratio. The average TDF charged 0.27% in 2025 per Morningstar, but yours could be triple that.
• Glide path type. “To” retirement reaches its most conservative point at the target year; “through” retirement keeps adjusting for 10 to 20 more years.
• Equity allocation at the target date. Some funds hold 30% stocks at retirement, others hold 50% or more.
• Underlying fund structure. Index-based or actively managed. The cost gap is roughly 53 basis points per Morningstar’s 2025 data.
• Vehicle type. Mutual fund or collective investment trust (CIT). CITs now hold 54% of TDF assets and usually run cheaper.

That list takes about ten minutes to verify in any prospectus. Most 401(k) participants spend zero minutes on it.

The reason these details matter is that target-date funds operate as the default investment in most defined contribution plans. If you didn’t actively pick anything when you enrolled, you’re almost certainly in one. That’s not bad. It’s just worth knowing what you signed up for.

Why do some target-date funds underperform a three-fund portfolio?

The honest answer is fees and overlap. A self-built three-fund portfolio using Vanguard’s total US stock, total international stock, and total bond index funds (VTSAX, VTIAX, VBTLX) can replicate the diversification of a Vanguard Target Retirement 2045 fund at a weighted expense ratio around 0.066%, compared to 0.08% for the TDF itself, per Financial Tortoise’s breakdown. That 0.014% sounds trivial. On a $1 million balance over 25 years, it’s over $20,000.

The gap gets uglier with actively managed TDFs. Those still run 0.50% to 1.00%+ per year in many corporate 401(k) plans, against 0.08% to 0.15% for index-based versions. Over a 30-year career, the difference can amount to tens of thousands of dollars in lost compounding, according to MoneyInstructor’s modeling. CNBC ran a hypothetical using NerdWallet’s fee calculator: $5,000 initial investment plus $5,000 per year for 40 years at 8% annualized return ends at $1.37 million with a 0.35% fee versus $1.25 million at 0.68%. The higher-fee investor pays roughly $260,000 in fees over the period; the lower-fee one pays about $140,000.

How do I read the glide path without becoming a finance nerd?

Open the prospectus and find the section labeled “investment strategy” or “glide path.” You’re looking for two numbers: the current stock allocation and the stock allocation at the target year. At the start of the glide path, many TDFs hold upward of 90% stocks; the more conservative ones sit closer to 50%, per Morningstar’s 2026 landscape report. That’s a massive risk gap hiding behind identical fund names.

Then check whether it’s a “to” or “through” glide path. The US Department of Labor specifically tells investors they need to know which type they hold. A “through” fund will keep adjusting equity allocation for 10 to 20 years after your target year, often holding 25% to 50% stocks deep into retirement to address longevity risk. Vanguard’s TDFs, for example, start at around 90% stocks and gradually decline to 30% stocks/70% bonds approximately seven years after the target date. If you planned to be fully de-risked at 65 and your fund is still 40% stocks at 70, that’s a planning mismatch you want to catch before a 2008-style equity drawdown.

Is my 401(k) plan stuffing me into the expensive version?

Possibly. The five largest TDF providers control roughly 80% of all target-date assets, with Vanguard alone at about 37% or $1.8 trillion, per Morningstar. But provider concentration doesn’t equal cheap access. Vanguard’s TDFs average 0.08% expense ratio; the industry average excluding Vanguard sits at 0.41% as of December 31, 2025. T. Rowe Price’s TDFs ranged from 0.49% to 0.64% as of June 2024, per 403bwise’s analysis. Same product category, six to eight times the cost.

There’s stuff the 401(k) system shows employers that participants never see, and this is exactly that. I’ve analyzed thousands of plan statements. Clear pattern: small employers tend to land in the higher-fee tier. Morningstar’s 2025 Retirement Plan Landscape found that 30% of 401(k) plans under $25 million in assets charge more than 100 basis points (1%) in total plan costs as of April 2025. If you work at a smaller company, the odds your default TDF is in the expensive bucket are meaningfully higher than at a Fortune 500 employer that negotiated CIT pricing.

Detail that makes all the difference: the 408(b)(2) fee disclosure your plan sends every year tells you exactly what you’re paying. Almost nobody reads it. Pull last year’s, find your TDF, and write the number down. That’s your starting line.

Smarter approaches when your default TDF is expensive

You don’t always have to abandon the TDF concept. Sometimes you just need to switch within the plan or build a simple replacement using the same fund menu. Here’s what tends to work in practice. First, check whether your plan offers an index-based TDF alongside the default. Many plans added a Vanguard or BlackRock index TDF in the past five years and never re-defaulted participants into it. If yours did, the switch is one form away.

Second, build a three-fund portfolio inside the 401(k) using the lowest-cost index options on the menu. A typical allocation for someone 20 years from retirement might be 60% US total stock index, 20% international stock index, 20% US bond index. The trade-off is honest: you save on fees but you have to rebalance yourself once a year. Set a calendar reminder for January and it’s a 15-minute job.

Third, if your only TDF choice is expensive and your fund menu is thin, consider contributing only up to the employer match in the 401(k) and routing additional retirement savings into a Roth IRA at a low-cost brokerage. You keep the match (free money) and avoid overfunding an expensive vehicle. That’s not the textbook answer, but for plans with truly poor menus it’s often the right one.

Your weekend project

Target-date funds aren’t the lazy investor’s tax. They’re the lazy investor’s discount, if and only if you happen to be in a plan that negotiated the cheap version. The work isn’t picking a different fund. The work is verifying once, in writing, that the default you’re already in deserves your next 30 years of contributions.

Three profiles, three plays:

• Under 35 with a TDF expense ratio above 0.50%: the fee drag matters most for you because compounding has the longest runway. Switch to an index TDF in the plan if one exists, or build a three-fund portfolio on the menu.
• 35 to 55 with a TDF in the 0.20%–0.40% range: the math is closer to neutral. Verify the glide path type and target-year equity allocation. Adjust risk only if there’s a real mismatch with your retirement age plan.
• Within 10 years of retirement: stop optimizing for fees, start optimizing for sequence risk. Confirm whether your fund is “to” or “through” and whether you’re comfortable holding 30%–50% stocks at the target date.

Pick your profile before you touch a single contribution slider.

Back at the bank we had clients who switched TDFs the week markets dropped 8% and locked in losses they didn’t need to take. Two complications worth planning around now: rebalancing a self-built three-fund portfolio gets emotionally hard in down years (automate it with a calendar reminder and a written rule, not a vibe check), and switching out of a TDF mid-career can briefly leave you misallocated if you don’t sequence the trades on the same day. Most plans let you change allocations and existing balances in a single submission. Use that.

This weekend, pull your most recent 401(k) statement and your plan’s 408(b)(2) fee disclosure, then write down three numbers: your TDF’s expense ratio, your current stock allocation percentage, and the stock allocation at your target year (the prospectus has both). Then visit U.S. Department of Labor for the official TDF tip sheet and Investor.gov for the SEC’s free fee analyzer tool. If your expense ratio is above 0.30% and your plan has an index alternative, the switch is the highest-return 20 minutes you’ll spend this year.