Should You Set It and Forget It?

Whenever you start a new job, you may be automatically enrolled in a 401(k), and your money will likely be invested for you, too. But where does that money actually go? And when (if ever) should you consider changing your investments?

According to recent Vanguard data, most 401(k) plans (98%) automatically invest workers in target-date funds (TDFs). These funds are a type of mutual fund that will automatically shift your investments from riskier assets, like stocks and mutual funds, towards more conservative assets, like bonds, as you get older.

These “set-it-and-forget-it” funds can work well for many investors, but not all. Here’s what to know about target-date funds, and when it may make sense to take a more hands-on approach with your 401(k).

What’s The Deal With Target-Date Funds?

When it comes to 401(k) plans, most workers are automatically enrolled and invested.

According to Vanguard, 61% of 401(k) plans in 2024 automatically enrolled participants. After a worker is enrolled, most won’t have to choose what to invest in either—nearly nine out of ten plans (89%) offered qualified investment alternatives or QDIAs.

With QDIAs, if you don’t actively choose any investments for your 401(k), your plan sponsor will automatically invest your contributions in either a TDF, a balanced fund, or a professionally managed account.

The vast majority of 401(k) plans with QDIAs offer TDFs, which are typically named for the year or time period that someone plans to retire in. For example, a 2050 target-date fund is for people who plan to retire 25 years from now.

A recent Morningstar analysis looked at 37 TDFs intended for 2025 retirees and found that these funds returned an annualized average return of 7.3% over 15 years, higher than anticipated.

Scott Sturgeon, CFP and founder of Oread Wealth Investors, says target-date funds are a sensible choice for most people, especially those who prefer a simplified approach to investing.

“They [TDFs] can do a decent job at matching your age and time horizon to roughly how much risk you should have in a portfolio. They’re not perfect or the best fit for certain individuals,” said Sturgeon.

Target-Date Funds Aren’t One-Size-Fits-All

Joe Petry, CFP and founder of Mayfair Financial, thinks TDFs are a good default investment option for investors who are unlikely to check their accounts, but he recommends that advanced investors take a more personalized approach by actively selecting investments.

“It depends on how sophisticated the investor is, but they [TDFs] are a very blunt tool,” said Petry. He suggests weighing factors like your investment horizon and risk tolerance, and then assessing investment options based on fees and whether the funds are actively or passively managed.

Sturgeon also points out that while TDF expense ratios have declined over time, some might still have high fees since they’re a type of fund of funds, which means that the expense ratio for the TDF itself includes the fees for the underlying funds as well.

For example, the Fidelity Freedom 2065 (FFSX) charges a 0.68% net expense ratio while the Fidelity 500 Index fund, an index fund tracking the S&P 500, charges a net expense ratio of just 0.015%.

When Sturgeon works with his clients, he evaluates their 401(k) investment menu carefully to see if it’s possible to minimize costs while still mimicking a TDF using the available investment options.

The Bottom Line

Many 401(k) plans automatically invest workers in TDFs. While they may be a solid starting point for some investors, especially those who prefer a hands-off approach to investing, they’re not the right solution for everyone.

More experienced investors may benefit from customizing their 401(k) portfolio based on factors like their time horizon and risk profile using the available fund options. However, Sturgeon notes that when investors take this approach, they will need to manually rebalance their portfolios on a regular basis to ensure their asset allocations align with their current goals.