There was a time in my career when I genuinely believed target-date funds were among the greatest innovations in retirement investing. As an Investment Analyst working in investment research, I analyzed nearly every type of fund available—mutual funds, ETFs, institutional portfolios, and model strategies. When target date funds became widely adopted in 401(k) plans, they seemed almost too good to be true.

"They were diversified. They automatically adjusted risk levels. They were incredibly cheap."

Some target-date funds had costs below 10 basis points (0.10%). At the time, I remember thinking: If a fund can diversify you, rebalance automatically, and get more conservative as you age—what role does an advisor even play anymore?

"For a while, I thought target date funds might make advisors obsolete. However, that belief didn’t survive real market cycles."

How Target Date Funds Are Supposed to Work

Target date funds are designed around a concept called a glide path. When you’re younger, the fund holds more stocks to capture growth. As you approach retirement, the product gradually reduces stock exposure and increases bond exposure to protect your savings. On paper, the logic is simple and appealing. Younger investors can tolerate volatility. Older investors supposedly can’t. Over time, risk should decline automatically.

This structure made target date funds the default option in many employer retirement plans—and for good reason. They removed decision-making, reduced emotional mistakes, and provided low-cost diversification. This also helped protect employers from liability. Imagine a new employee who was unaware they even had money in a 401(k), had their funds sitting in cash for several years, and missed out on the stock market rally.  The employer could be liable, but with a target date as the default product, it gave employees some exposure to the stock market based on their retirement age, which satisfied the regulators. When coupled with automatic enrollment, employers could reduce their liability for any lack of oversight.

"Early in my career, I appreciated the simplicity of a Target Date Fund. Then 2013 happened."

2013: The First Crack in the Story

In 2013, the bond market experienced what became known as the “taper tantrum.” Interest rates rose quickly, and long-term bonds fell sharply in value. At the time, I was actively covering target date funds—and what I saw surprised me. Many funds designed for people already in retirement were heavily invested in long-duration bonds. These were supposed to be conservative portfolios. Instead, retirees experienced losses that felt anything but conservative.

What bothered me most wasn’t just the losses—it was that they were unnecessary. These investors weren’t chasing returns. They were simply following a system that underestimated bond risk. It took fund companies years to respond. Eventually, many target-date funds shortened bond duration and moved toward intermediate bonds to reduce the excessive risk their most conservative investors unknowingly face.

"The lesson, I thought, had been learned. It hadn’t. The market continued to change, and these products have not adapted quickly enough."

2022: When Bonds Failed Again

Fast forward to 2022, one of the worst years for bonds in U.S. history. The broad bond market fell roughly 13%, a shocking outcome for investors who believed bonds were their safe haven. Once again, target-date funds failed the people who needed protection most. Investors nearing retirement—who believed they were positioned conservatively—saw losses far larger than they expected. The same structural flaw appeared again: the assumption that bonds are inherently safe, regardless of interest rate risk.

This wasn’t a one-off event. It was a pattern. Many of these disasters could have been avoided by common sense. For example, when interest rates were close to 0%, rates could only move higher in most scenarios. When rates rise, bond values tend to fall. So would it make sense to chase a yield that could be under 2% with an expected loss of 13% if rates moved higher quickly? It was common sense among many advisors that rates would only rise. But this was largely ignored by target-date funds, which might wait for a disaster and take their time reacting to the aftermath rather than being proactive.

"After more than five years running Marc Alan Wealth Management and reviewing hundreds of real retirement accounts, my concerns about target date funds have only grown."

What I See Now Reviewing Real Portfolios

One of the biggest issues is timing. Many people save the most money in the final years before retirement. This is a critical time to invest as much as possible, seek strong returns, and invest like your future depends upon it, because it likely does! Yet target date funds may automatically reduce stock exposure during this exact period—regardless of market conditions, income stability, or contribution levels. So imagine you are investing 20k of your salary every year, and 10 years ago this was buying about 20k of stock, but since you are now closer to your retirement date, your stock and bond mix in the fund has changed, so that same 20k contribution might only be buying 10k of stock, with an extra 10k going into bonds!

"The change in a target-date fund's stock and bond mix is driven by its glidepath, which becomes more conservative over time. This shift affects more than just your current contributions; even though your entire account value has grown, you may now own less stock than you did 10 years ago! "

To add to the aggravation, if stock markets decline late in your career, target date funds can force you to buy more bonds and sell stocks at lower prices—precisely when long-term investors may benefit from staying invested or even increasing equity exposure. So when the stock market is falling, and we think we are dollar-cost averaging when a new contribution from our paycheck arrives, we might feel we are buying stock at a lower price, but in reality, the target-date fund could be selling stock faster than we can buy it! Each target-date fund is different, so it's worth a conversation with Marc Alan Wealth Management to see how much this may impact you. 

In most cases, Target Date Funds have no discretion. No intelligence. No ability to adapt. The fund follows the calendar, not the person or what's happening in the markets. It uses the set-it-and-forget-it concept, which could have unintended consequences in both the short and long term.

Why “Conservative” Doesn’t Always Mean Safer

Another issue I see repeatedly is inefficient bond exposure. Many target date funds hold international bonds with yields around 3%. Investors take on interest rate risk,  and global credit risk—all for very modest returns. Worst yet, most international bonds are denominated in US dollars and don't benefit from a US dollar depreciation, a potential hedge that could limit portfolio volatility.  This means that instead of collecting 4% on a US Treasury, you are collecting 3% on a sovereign debt that could be less secure than a US Treasury!

At the same time, target date funds typically avoid alternative strategies, private credit, or other tools that can help manage risk differently. There has even been recent discussion about adding private investments to target date funds, raising concerns about higher fees, reduced liquidity, and less transparency.

"The main advantages of target date funds—their low cost and transparency—may not last forever."

A 529 Plan Example That Says It All

I’ve also seen these issues extend beyond retirement accounts. In one case involving a 529 college savings plan, a child was still many years away from college, yet the target date fund had already shifted heavily into conservative bonds. The problem is that college expenses aren’t paid all at once. They’re spread over four years, and some funds may remain invested for a decade or more. Becoming overly conservative too early can significantly limit growth—especially when markets eventually recover.

"Again, the glide path didn’t match real life and may compromise not just your retirement but your children's college funds."

Good Intentions, Flawed Execution

To be clear, target date funds were created with good intentions. For some investors, they may still serve a purpose. But after living through multiple market cycles, analyzing fund behavior in real time, and reviewing actual investor outcomes, I no longer believe they are the best default solution—especially for people nearing retirement.

"They are too rigid and may not account for your personal circumstances. Typically tax inefficient. Too disconnected from current market circumstances."

Retirement planning shouldn’t be based solely on age or a calendar year. It should reflect income, goals, tax considerations, risk tolerance, and how people actually save and spend over time.

A Smarter Way Forward

I used to love target date funds. Experience and Knowledge changed my mind. At Marc Alan Wealth Management, we focus on building retirement strategies that are flexible, tax-aware, and tailored to the individual—not a glide path designed for the masses. If you want a retirement plan that adapts to you, not just your birth year, it’s worth having a deeper conversation. That’s where better outcomes usually begin.

Wishing you the best,

Marc Lescarret