Quick overview

Target‑date funds (TDFs) are designed to match an investor’s asset allocation to a target retirement year—typically shown in the fund name, e.g., “Target Date 2045.” Fund managers follow a glide path: a formula that gradually reduces exposure to riskier growth assets (equities) and increases holdings in stable assets (bonds and cash equivalents) as the target date approaches. Because they combine diversification, automatic rebalancing, and an age‑based risk schedule, TDFs are a practical option for workers who want a single, set‑and‑forget solution inside employer retirement plans (401(k), 403(b), or similar). (U.S. Department of Labor: Understanding Target‑Date Funds: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/understanding-target-date-funds)

Why employers choose target‑date funds (and what QDIA means)

Many plan sponsors name a target‑date fund as the plan’s Qualified Default Investment Alternative (QDIA). A QDIA lets new participants who don’t make an active investment choice get automatic enrollment without exposing the plan fiduciary to certain types of liability, provided the fiduciary followed selection rules. If you’re in an auto‑enrollment plan, that means you may be automatically placed into a TDF aligned with your birth year or estimated retirement year.

See the Department of Labor’s guidance on QDIAs and plan fiduciary responsibilities for current rules and best practices: https://www.dol.gov/agencies/ebsa.

How glide paths actually work

The glide path is the heart of every TDF. It specifies the target allocation to stocks, bonds and cash at each point in time between the fund’s inception and its stated target date. Glide paths vary in two key ways:

  • Pace: Some glide paths are “steep,” rapidly reducing equity exposure as the target date approaches; others are “gentle,” keeping a higher equity share even past the retirement date.
  • Shape: Some funds use a straight line decline, others use step changes or keep a “retirement income” allocation that continues to invest for growth after retirement.

Because glide paths differ, two funds labeled “2050” can look meaningfully different. If you want a deeper explanation of glide paths and how the retirement mix changes over time, see our glossary page: Target‑Date Glidepath: What It Means for Your Retirement Mix.

What to evaluate before you use a target‑date fund in your employer plan

When deciding if a TDF is right for you—or which TDF to pick—consider the following checklist:

  1. Glide path details: Review the glide‑path chart (available in the fund prospectus) to see how equity exposure falls over time and whether the glide path continues to reduce risk after the target date or levels off.
  2. Fees and expenses: Compare expense ratios and underlying fund costs. TDF fees commonly range from very low (index‑based TDFs around 0.05–0.30%) to higher for active strategies (0.40–0.80%+). Fees compound over decades; the Department of Labor advises careful fee review (see: Retirement Plan Fees and Expenses: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/retirement-plan-fees-and-expenses).
  3. Underlying investments: Check whether the target‑date fund invests in broad index funds or higher‑cost active strategies and whether it uses in‑house affiliated funds.
  4. Benchmarking and performance: Look at long‑term performance versus comparable benchmarks and peer funds, but remember past returns do not guarantee future results.
  5. Target‑date label and “to” vs “through”: Some funds are labeled “To 2045” (designed to reach a target allocation at that year) and others “Through 2045” (designed to remain invested with a retirement allocation beyond 2045). Choose the label that matches your expected retirement and post‑retirement needs.
  6. Tax considerations: Within a workplace retirement plan, TDFs are tax‑advantaged wrappers (pre‑tax or Roth), but tax efficiency of underlying holdings matters if you later roll outside the plan.

These evaluation steps are consistent with guidance from the DOL and SEC investor education material (see: SEC Investor.gov: Target‑Date Funds: https://www.investor.gov/introduction-investing/investing-basics/mutual-funds-etfs/target-date-funds).

Practical examples and lifecycle use

  • Young saver (20s–30s): A TDF labeled 2060 or 2065 will typically be equity‑heavy (70–90% stocks) to maximize growth potential. In my practice, I’ve seen young clients benefit from the compounding effect when they stick with a low‑cost index‑based TDF.
  • Mid‑career saver (40s–50s): A 2035 or 2040 fund starts to reduce volatility; review the glide path now and confirm the fund’s expense structure. Consider supplementing the TDF with additional investments if you want higher bond exposure or, conversely, more growth.
  • Near or at retirement (60+): The allocation will be bond‑heavy. For clients retiring earlier or needing income, I recommend checking whether the TDF provides a retirement income share class or whether you’ll need to move assets to an income fund or annuity.

Real‑world case: A client who began in an employer plan at age 30 and selected a 2055 TDF kept it for 25 years. Because the fund used low‑cost index exposures and a gradual glide path, the client experienced strong compound growth with a smooth transition toward capital preservation—exactly the lifecycle outcome the TDF aimed to deliver.

How a TDF fits with a broader retirement strategy

A target‑date fund can be the centerpiece of a plan—or one piece of a multi‑fund strategy. Use TDFs when you want simplicity and automatic lifecycle rebalancing. Consider adding:

  • A separate bond sleeve or stable value fund for near‑term liquidity needs; see our guide on Asset Allocation Fundamentals: Balancing Risk and Return.
  • Employer stock considerations: If your employer match comes in company stock, weigh the concentration risk separately; you may need to diversify outside the TDF.
  • Tax‑efficient vehicles: Use an HSA or Roth contributions to complement the retirement glide path when appropriate.

Common mistakes and how to avoid them

  • Assuming all TDFs are the same: Compare glide paths, fees and underlying holdings. Two funds labeled with the same date can behave very differently.
  • Blindly keeping a default: Even if auto‑enrolled into a TDF, review the selection annually or when your life changes (job change, marriage, inheritance). If your plan offers financial advice services, use them.
  • Ignoring fees: A 0.50% higher annual fee can erode a meaningful portion of retirement savings over decades.

Governance and fiduciary considerations for plan sponsors

Plan fiduciaries selecting a target‑date fund must document their process, consider costs, and periodically review the choice to satisfy ERISA responsibilities. The DOL provides a fiduciary checklist and best practices for plan sponsors when selecting QDIAs: https://www.dol.gov/agencies/ebsa.

For plan sponsors looking to improve default investment outcomes, our related guide on maximizing plan benefits provides practical steps: Strategies for Maximizing Employer Retirement Plan Benefits.

Action checklist for participants (quick)

  • Locate the fund prospectus and glide‑path chart. Read the fee table.
  • Note whether the fund is labeled “to” or “through” your expected retirement date.
  • Compare expense ratios and underlying fund types (index vs active).
  • Ask HR or the plan administrator whether the TDF is the plan’s QDIA and how that affects default enrollment.
  • Revisit your choice after major life changes or every 1–2 years.

Final practical tips from practice

In my experience advising employees and plan sponsors, the best use of target‑date funds is when they’re combined with regular contributions, low fees, and periodic reviews. I often recommend younger clients pair a low‑cost TDF with automatic contribution increases. For savers nearing retirement, I help them confirm whether the TDF’s glide path aligns with their income plans and whether they need an explicit income solution.

Sources and further reading

Professional disclaimer: This article is educational only and does not constitute individualized financial, tax, or legal advice. Consult a qualified financial advisor or tax professional before making decisions that affect your retirement savings.