A 401(k) Fund Labeled 2040 Still Doesn’t Tell You When to Retire or How Much Risk Fits You

Quick Read

• A target-date fund’s name only points to an intended retirement year; it does not determine the right level of risk for an individual, and the SEC says these funds do not guarantee enough retirement income.

• Two 2040 funds with stock/bond blends of 65/35 and 50/50 would differ by $27,000 in losses during a 30% market decline, but by just $2,700 in gains in an ordinary year.

• Investors should review the fund’s glide path, fees, and stock allocation, and keep six to 12 months of emergency cash outside a 401(k) to avoid expensive early withdrawals.

• The biggest 401(k) decisions are often made once and then ignored: when to roll over the account, what to invest in, and when withdrawals should begin. That is what the report 401k & IRA Tips and Answers was designed to explain, and it is free to access. (Sponsor)

A 51-year-old with $600,000 in her 401(k) chooses a 2040 target-date fund because the year seems to line up with her plans: she will turn 65 in 2040.

What she does not do is open the fact sheet to see what the fund will actually hold as she gets older. That single missed step could mean the difference between losing $90,000 or $117,000 in a down market.

The saver is hypothetical, but the issue is very real. At 51, she still has time to make the choice before relying on the account for income.

What a 2040 Label Actually Means

The date in the fund’s name tells investors when the fund is designed to be suitable for retirement, not whether its allocation fits their own needs. Managers make assumptions about risk and the lifespan of the money, but they cannot know each investor’s circumstances. The SEC warns that target-date funds do not promise enough retirement income, even if they are held through the year on the label.

Each fund manager creates a glide path, which is the plan for shifting money from stocks into bonds over time. Two funds with the same label can have very different allocations, and they generally fall into two broad categories:

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For many Americans, saving in a 401(k) only raises more retirement questions. Should you move the money into an IRA, and if so, when? What happens tax-wise if the rollover check is made out incorrectly? When do required withdrawals start, and how much must be taken?

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• A “to retirement” glide path reaches its most conservative point at the target year and then stays there.

• A “through retirement” path keeps shifting toward bonds for years after the label date, so it holds more stock in the years leading up to 2040.

Same Year, Very Different Outcomes

Imagine her entire $600,000 is invested in one of two hypothetical 2040 funds. In the weak-market scenario, stocks drop 30% while bonds are unchanged. In the stronger-year example, stocks rise 7% and bonds return 4%.

In the simulated downturn, Fund B loses $27,000 less. In the positive-year example, Fund A earns $2,700 more. Over time, a heavier stock allocation offers more growth, but it also exposes the investor to larger losses. And because target-date funds gradually adjust their mix, the allocation will not necessarily remain the same on the way to 2040.

This trade-off matters. A fund that becomes too conservative too quickly may struggle to keep pace with rising living costs during a long retirement. But a higher stock allocation also means greater losses when markets fall. The research inflation measure for older Americans increased 3.6% over the past year, while the standard Medicare Part B premium rose to $202.90 a month in 2026 from $185. She needs enough growth to support retirement without taking on more risk than she can handle.

Her contributions make the glide path even more important. At 51, she can put in as much as $32,500 in 2026, including the regular catch-up contribution. Under current rules, workers ages 60 through 63 can make an even larger catch-up contribution, though those dollar limits will change before she reaches that age range. Every contribution buys into the investment mix selected by the manager.

Five Things to Check in Your Own 2040 Fund

1. Current stock and bond split. Look at the fact sheet and compare today’s equity share with the amount of loss you could tolerate in a 30% decline. You can use the same rough calculation shown above for your own balance.

2. Glide path ending point. See when the fund stops becoming more conservative. If it reaches its most conservative point in 2040, it is a “to” fund. If it keeps shifting for years after that, it is a “through” fund. Within the same fund family, choosing 2035 instead of 2040 usually means a more conservative mix, while 2045 usually means more stock exposure.

3. Expense ratio. Consumer advocate Clark Howard often points to low-cost target-date index funds charging about 0.20% a year or less. On a $600,000 balance, a 0.20% expense ratio costs $1,200 a year, versus $4,500 at 0.75%. Also check for any extra plan fees.

4. Employer default. If your plan enrolled you automatically by birth year, your employer picked the manager and glide path. Make sure those assumptions match your actual retirement date, because your plan may include a better option.

5. Separate emergency savings. The bond portion of the fund should not serve as your emergency stash. Before age 59½, early withdrawals can trigger a 10% additional tax. Later, pulling a large amount from a pretax 401(k) could raise your taxable income and eventually increase Medicare premiums. Keeping six to 12 months of expenses in accessible savings can help you avoid raiding retirement investments for emergencies.

The date in the fund name is only a starting point. Your actual retirement timing and comfort with losses should determine the allocation, and checking it takes only about 15 minutes with the fact sheet.

Released: 401k & IRA Tips and Answers

(sponsor) 401(k)s are powerful retirement tools. But even experienced savers can make mistakes that quietly drain money for decades. Choosing the wrong fund, overlooking small fees that are never added up, or completing rollover steps in the wrong order can all cause damage.

Those kinds of mistakes are exactly what 401k & IRA Tips and Answers was created to help prevent. It is a free guide from Fisher Investments covering rollovers, contributions, required withdrawals, and the errors that can do the most harm to a retirement account. Learn More Here ›