If you're contributing money to a 401(k) plan on a regular basis, you're doing your part to set yourself up for a secure retirement.
Social Security might only replace 40% of your pre-retirement paycheck if you earn an average wage. But living on 60% less income could be challenging, even at a time when your expenses might be lower. So it's important to have savings to supplement those benefits.
Image source: Getty Images.
But as crucial as it is to steadily fund a 401(k) plan, it's just as important to invest your money wisely. And recent data from Fidelity reveals that almost two-thirds of 401(k) savers may be making a huge mistake in that regard.
Are you shorting yourself on 401(k) returns?
Most 401(k) plans offer a mix of investment choices. But if you don't actively choose investments for your savings, there's a good chance your money will land in a target date fund.
A target date fund simplifies the process of investing for retirement. That's because it's designed to automatically adjust your asset mix based on where you are in your retirement journey.
When retirement is far off, a target date fund will generally invest more aggressively so that your money is able to grow. Then, as retirement nears, you'll be shifted into more conservative assets.
Put another way, a target date fund is pretty much a "set it and forget it" type of investment. And because many 401(k)s default contributions into target date funds when savers don't select other investment options, they're a pretty common choice.
In fact, as of the third quarter of 2025, 62.8% of 401(k) savers overall had all of their money in a target date fund, according to Fidelity. But that's a mistake that could cost you.
See, one drawback of target date funds is that they tend to err on the side of investing too conservatively. The result? Lower returns, and less money for your retirement.
Also, the fees associated with target date funds may be higher than other 401(k) funds, eating away at your returns.
Plus, target date funds aren't customizable. But you may have a different risk tolerance, set of retirement goals, or mix of additional income streams than other savers your age. A target date fund won't account for that.
Play an active role in choosing your 401(k) investments
While letting your money land in a target date fund might seem like the easiest way to invest for retirement, you could end up stunting your savings' growth and losing money to high fees. Rather than do that, explore your 401(k)'s investment choices and see if there are options that better meet your needs than a target date fund.
You may, for example, find that loading up on broad market index funds makes more sense given your age and risk tolerance. Index funds are passively managed and therefore tend to come with relatively low fees. Then, as retirement nears, you could always adjust your own strategy to lower your 401(k)'s risk profile.
Of course, after reviewing the other choices available in your 401(k), you may decide that a target date fund is right for you. And that's OK. The key, however, is understand the potential drawbacks of putting your money into one of these funds so you don't end up kicking yourself later.
