The 401(k) decision many workers make without realizing it

Joining a workplace 401(k) is one of the most efficient ways to save for retirement. In a traditional 401(k), contributions are made before taxes and investment growth is tax-deferred, so there is no annual tax bill. Roth 401(k)s work differently: contributions are made after taxes, but qualified gains and withdrawals are tax-free.

Either way, the money needs to be invested in a way that matches your goals, which means choosing the right funds matters. There is no broad data showing how many 401(k) savers actively select their own investments, but among participants in Vanguard retirement plans, only 31% choose their own funds.

Many savers may not realize they are supposed to make an investment selection, or they may find the process overwhelming. Some simply accept whatever is set up for them. If you do not log in and make a choice, your employer may select investments on your behalf, which is allowed. In many cases, that default option is a target date fund.

Vanguard says 96% of its retirement plans offered target date funds at the end of 2025. In plans where employers selected default investments for 401(k) participants, 98% of those defaults were target date funds. Still, financial advisers say those funds are not always the best fit.

How target date funds work

Retirement investing usually has to change over time. When retirement is far away, the focus is often on growth and higher risk, which is why a larger share of the portfolio may be in stocks. At that stage, there is time to recover from market declines before the money is needed.

As retirement gets closer, many investors shift more money into safer assets such as bonds. That can help reduce the risk that a market slump will damage savings just before work ends.

A target date fund handles that shift automatically. You choose a fund tied to the year you expect to retire, and the fund adjusts its mix of assets over time. It generally starts with more stocks and gradually becomes more conservative as the target date nears.

The drawbacks of target date funds

Target date funds can be useful, but it is important to know their limits.

Matt Hylland, a financial planner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa, says target date funds can be a good choice for someone who wants to put a 401(k) strategy on autopilot and avoid constantly monitoring investments.

He also warns that these funds can carry relatively high expense ratios, which may reduce long-term returns.

“If you have a target date fund from Vanguard, you’ll likely have very low fees,” he says. “However, there are many other target date funds that charge between 0.50 percent and 1 percent in annual fees.”

Vanguard says the average expense ratio for target date funds is 0.41%. If your plan’s target date fund is much more expensive, Hylland suggests checking whether the plan offers lower-cost options that still match your strategy.

For example, an S&P 500 index fund may offer broad stock market exposure at a lower cost. You could combine that with a bond fund and adjust the allocation yourself as retirement draws nearer.

Some 401(k) plans offer both actively managed and passively managed target date funds. Active funds use a manager to buy, sell, and rebalance holdings, while passive funds track market indexes and often come with much lower fees.

Hylland also says target date funds may not suit people who want a more aggressive mix.

“Target date funds get very conservative as you age, usually as low as 30 percent in total stock exposure. Make sure that conservative allocation works with your plan,” he says. “Depending on your assets and other sources of retirement income, you may want a higher allocation to stocks in order to have a better chance at keeping up with inflation over time.”

Don’t leave it to chance

Whatever you decide, the key is not to let your 401(k) land in a default fund without understanding how the money is invested or what fees apply.

Zachary Mineur, chief investment officer at Independence Square Advisors in King of Prussia, says participants should contact their HR department, check workplace portals, or review plan documents to find out what the default investment is and what other choices are available.

If those options are unclear, Mineur says a financial planner can help determine the best investments for a 401(k) based on age, risk tolerance, outside assets, and overall goals.