Target Date Funds: What They Are and How They Work

Target date funds are a simple option for retirement investing but can come with high fees.

By Kailey Hagen – Updated Feb 13, 2025 at 12:52 AM

Key Points

Target date funds automate portfolio rebalancing, shifting from stocks to bonds as retirement nears.
Investors save time with target date funds, making them suitable for those who prefer a hands-off approach.
Be aware of fees; target date funds charge up to 1%, reducing potential investment returns.

A target date fund is a type of mutual fund structured to make it easier for investors to maintain a desirable asset allocation over time.

While young investors should allocate the most money to higher-risk assets like stocks, investors nearing retirement are advised to structure their portfolios more conservatively. Most investors rebalance their portfolios manually, but owning shares in a target date fund automates the rebalancing process.

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Hand drawing a bar graph labeled Retirement Plan. — Image source: Getty Images.

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glide path example 1 for target date fund — Image source: Securities and Exchange Commission.

glide path example 2 for target date fund — Image source: Securities and Exchange Commission.

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Pros

Simplicity: Most 401(k) plans only offer one target date fund (with multiple options for the target date). If you invest in a target date fund, you don't need anything else in your retirement portfolio.
Automation: Target date funds automate the process of adjusting your asset allocation. You don't need to ever manually rebalance your portfolio if you invest in a target date fund.

Cons

Lack of customization: Every investor in a target date fund has the same asset allocation, regardless of their individual risk tolerances or investing goals.
Potentially high fees: With the expense ratios of many target date funds approaching 1%, the fees associated with target date funds can significantly lower your investment returns. While 1% might not sound like a lot, the nature of compound interest means that small annual fees can add up to substantial lost value for your portfolio over time.
Lack of control: Investors in target date funds don't get to choose which specific securities the target date funds invest in.

Compound Interest

Compound interest is what you get when you reinvest your earnings, which then also earn interest.

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About the Author

Kailey Hagen, CFP, is a contributing Motley Fool retirement analyst covering Social Security, Medicare, and retirement planning. Before The Motley Fool, Kailey was a research analyst for Reviews.com focusing on credit and banking products. She is a Certified Financial Planner® and holds a bachelor’s degree in English from the University of Wisconsin-Madison.

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Kailey Hagen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.