Regular contributions to a 401(k) plan remain a cornerstone in building financial security for retirement. Social Security benefits alone typically replace approximately 40% of an average wage earner’s pre-retirement income. Living with a 60% reduction in earnings poses practical challenges, even as certain expenditures decline post-retirement. Therefore, supplementing these benefits with adequate personal savings is crucial to maintaining one's standard of living.
Despite the importance of consistent funding, the approach to investing within a 401(k) demands careful consideration. Fidelity’s recent analysis reveals that nearly two-thirds of 401(k) participants might be compromising their retirement outcomes by relying solely on default investment options.
A common default mechanism in many 401(k) plans is the target date fund. These funds are designed to provide a streamlined investing experience by automatically adjusting the portfolio’s asset allocation based on the participant’s projected retirement date. In the early stages of a saver’s career, target date funds emphasize growth through exposure to more aggressive investments. As retirement approaches, the asset mix shifts toward more conservative holdings intended to preserve capital.
This "set it and forget it" strategy simplifies decision-making for participants who may lack the time, understanding, or interest to actively manage their account allocations. Consequently, many 401(k) contributions are funneled into target date funds by default when participants do not select specific investments themselves.
Data from the third quarter of 2025 shows that 62.8% of all 401(k) holders had their entire balances invested in target date funds, illustrating the prevalence of this practice. However, this widespread reliance raises concerns about the suitability of such funds for all participants.
One notable issue with target date funds is their tendency to adopt a cautious investment posture. While risk reduction is generally favorable as retirement nears, the conservative nature of these funds can lead to suboptimal growth over an individual's accumulation phase. This cautious allocation may result in overall lower returns, ultimately shrinking the nest egg available at retirement.
Moreover, these funds can carry higher fees compared to other 401(k) investment options. Elevated expense ratios can erode investment gains, diminishing the effective return on savings.
Additionally, target date funds are inherently non-customizable. Individuals vary widely in their risk tolerance, retirement objectives, and alternative income sources. A one-size-fits-all approach does not allow for adjusting investment strategies to reflect personal circumstances or preferences.
Given these factors, participants might benefit from assuming a more proactive role in managing their 401(k) investments. An examination of the plan’s available options could reveal alternatives more closely aligned with individual goals and financial situations.
For example, younger investors with a higher risk tolerance may prefer broad-market index funds. These passively managed funds typically offer lower fees and broad diversification, potentially fostering stronger growth over the long term. As retirement approaches, savers can independently revise their portfolios toward more conservative allocations to mitigate risk.
Nonetheless, selecting a target date fund remains a valid choice for some participants, especially those valuing simplicity and institutional asset management. The critical consideration is to recognize the inherent trade-offs of these funds, including the impact of conservative positioning and cost structures, to make informed retirement planning decisions.