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Target-date funds are a retirement saver's darling, but advisers have some concerns for those getting ready to retire.
Target-date funds hit a record high last year. Assets in these funds jumped to a peak of $4.8 trillion in 2025, up more than 20% from the end of 2024, according to Morningstar.
Over the past decade, the industry has grown 11.9% a year, "reflecting both market appreciation and steady retirement-plan contributions," said Morningstar analyst Mahi Roy.
Now, nearly all 401(k) plan sponsors and most state auto-IRA programs use target-date funds when they automatically enroll workers in a retirement plan.
To recap: With a target-date retirement fund, you choose the year you'd like to retire and buy a mutual fund with that year in its name, like Target 2044. The fund manager then allots your investment between stocks and bonds, typically made up of index funds, and adjusts it to a more conservative mix as the target date nears.
But there's a risk of losing out on big equity gains when the stock market is cooking — like now.
No one questions that target-date funds can be a useful starting point for younger workers beginning to save in a 401(k). They offer diversification, automatic rebalancing, and discipline without requiring the participant to make ongoing investment decisions.
While stocks can generate investment growth during the prime saving years, bond holdings provide steady consistency when the economy and markets slump.
"Target-date funds solve a real problem," said Jeff Judge, a financial adviser with Chesapeake Financial Planners in Forest Hill, MD. "Most people never rebalance, never check their allocation, and would be far worse off doing nothing. For that saver, a single, well-run fund beats a neglected 401(k) every time."
The downside of a set-and-forget strategy
Every one-size-fits-all solution has pitfalls.
"The bigger issue with target-date funds for near-retirees isn't necessarily that they become too conservative, it's that they can become conservative in the wrong way," Rob De Lessio, a director at Strategic Wealth Designers in Cincinnati, Ohio, told Yahoo Finance. "As someone approaches retirement, I become much less enthusiastic about them."
The traditional glide path generally reduces equity exposure and increases bond exposure as retirement approaches, so on the surface, that sounds like reducing risk, he said.
Bonds and bond funds, however, also carry "interest-rate risk, credit risk, and market risk, and we've seen periods where stocks and bonds declined at the same time," De Lessio said. "That can leave a near-retiree with an interesting problem: less upside potential without necessarily getting the downside protection they thought they were buying."
Importantly, inflation, rising healthcare costs, and longer life spans can make investing too conservatively in your 50s and 60s a hazard.
Plus, the glide path isn't set to a person's actual balance, spending needs, or other assets, Judge said.
"Someone with a pension, a paid-off house, and a healthy taxable account gets de-risked at the same pace as someone with nothing else to fall on," he said. "That's the mismatch. A saver who goes heavily conservative at 65 may be locking in lower returns for a retirement that's nowhere near over."
The biggest concern, however, is not simply missing the next bull market, said Jon Ulin, a financial adviser in Boca Raton, Fla. "Near-retirees face two competing risks. Too much equity exposure is a serious problem if a bear market hits as withdrawals begin. But becoming too conservative too quickly can create longevity and inflation risk while sacrificing future equity growth."
Nearing retirement? Take another look at your target-date fund. Pull up your target-date fund's glide path and see what percentage is actually in stocks today, Matt Chancey, a financial planner in Winter Park, Fla., said.
Check to see if your fund follows a "to retirement" or a "through retirement" approach. A "to retirement" approach will tend to reach its most conservative allocation at the target date, while a "through retirement" fund can continue reducing equity exposure for many years after retirement, which may result in an underweight to equities in your overall asset allocation, said Edward Mahaffy, a financial planner in Fort Worth, TX.
Don't pick a fund solely on its target year. Evaluate its glide path, equity allocation, underlying investments, fees, and "to" versus "through" retirement philosophy, said Mike Casey, a financial planner in Alexandria, Va.
"Two 2035 funds can have meaningfully different risk profiles. For someone five years from retirement, I also look at the target-date fund in the context of the entire household balance sheet. Social Security, pensions, cash reserves, and other assets can materially change how much portfolio risk is appropriate."
"The goal isn't to maximize equity exposure or minimize it," he said. "It's to build a portfolio with enough growth potential to address longevity and inflation while maintaining enough high-quality, liquid assets to withstand a severe bear market without selling equities at the worst possible time."
Diversify your target-date fund portfolio. Sort your savings by when you'll spend them, said Chancey. "Money for the first five years belongs somewhere conservative, and your current target-date fund likely does that job well. Money you won't touch for 15-plus years can sit in a later-dated fund in the same employer plan lineup. You're allowed to own a 2045 fund at 62… nobody checks your ID at the door."
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including "Retirement Bites: A Gen X Guide to Securing Your Financial Future," "In Control at 50+: How to Succeed in the New World of Work," and "Never Too Old to Get Rich." Follow her on Bluesky.
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