The Retirement Fund That Knows Almost Nothing About You
Target date funds are very popular and a seemingly elegant investment solution for many. The industry had $4.8 trillion at the end of 2025 and grew at 20% last year.
Your 401k’s default investment was selected based on the year you plan to retire, not your investment horizon. No one asked about your risk tolerance, your other assets, your Social Security income, or your life expectancy at retirement age. In a $4.8 trillion industry, that information gap has a dollar value and almost no one has calculated it.
Target date funds are very popular. Performance of the longest dated funds was very good in 2025, as they allocated to international equities that performed much better than the S&P 500, up 17.88% in 2025, as the benchmark index, MSCI EAFE had a total return of 31.22%. For those with long investment horizons target date funds delivered very competitive returns. Expense ratios of target date funds continued to decline and according to Morningstar year-end asset-weighted net expense ratios for target-date mutual funds were 0.27%, down from 0.55% a decade earlier.[1]
This apparently elegant and relatively efficient investment solution is wildly attractive and comforting but investors should understand the context much better than the industry explains and that addresses investment strategy after normal retirement.
A Vehicle Designed for the Average Investor
Target date funds were created with a straightforward premise: pick the fund with the year closest to your expected retirement, and the fund does the rest. As that date approaches, the fund automatically shifts from stocks toward bonds, a process the industry calls a “glide path.” The logic is clean. The execution is generic by design.
The industry acknowledges this in language buried in fund prospectuses. Target date fund asset allocations are, in the words of one major provider, “geared to the average investor.” That phrase should give every 401k participant pause. The average investor is a statistical construct. It is not you, and it is almost certainly not the person sitting next to you.
What the fund knows: the year printed on its label.
What the fund does not know: your investor risk score, your risk tolerance, the value of assets you hold outside your 401k, your anticipated Social Security benefit, your health status, your life expectancy at retirement age, or whether you plan to draw down your portfolio immediately or let it continue growing for another two decades.
None of that information enters the calculation. The glide path runs on a single input.
The Glide Path and What It Costs You
The glide path is the mechanism by which target date funds reduce equity exposure over time. A fund with a 2026 target date has already made most of that journey. By the time a participant reaches retirement, industry data suggests equity allocations across target date funds range from roughly 30 to 50 percent, depending on the provider and glide path design. The remainder sits in bonds and cash equivalents.
This allocation reflects a specific assumption: that the primary risk facing a 65-year-old is a market decline that erodes the portfolio just as withdrawals begin. That risk is real. But it is not the only risk, and for many investors it is not the largest one.
The risk that target date funds systematically underweight is longevity risk, the risk of outliving your assets. A 65-year-old American today has an average life expectancy that extends well into their mid-eighties. For a couple, the probability that at least one partner lives past 90 is substantial. That is a 20 to 25-year investment horizon, not a five-year one. A portfolio allocated 30 to 50 percent to equities is not engineered to grow meaningfully over that horizon. It is engineered to not fall sharply in the near term.
Those are different objectives. They serve different investors. The fund does not distinguish between them.
Research has confirmed what the math implies. Studies have found that many target date funds become too conservative for most investors around age 50, well before retirement, limiting growth potential at precisely the stage when compounding still has time to work. This has been especially costly in the recent ten year period when the S&P 500 has produced a total annualized rate of return of 14.16% through March 31, 2026, well above the 99 year average annualized rate of total return of 10.4%. The structural result is what investment professionals call longevity risk: a portfolio that survives the early years of retirement in reasonable shape but runs short of assets in the later ones, when the investor has the fewest options.
Consider what that looks like in practice. A participant in a major target date 2025 fund holds approximately 50 percent stocks at retirement. Over the following seven years, ages 65 to 72, the fund continues reducing equity exposure, arriving at a permanent allocation of about 30 percent stocks and 70 percent bonds. At that point the fund merges into an income-focused vehicle explicitly designed, in the fund company’s own words, for “capital preservation.” For an investor with a 67-risk score[2] and a life expectancy extending another 20 years beyond 65, the growth engine has been turned off at precisely the moment it still had two decades of compounding ahead of it.
The Opportunity Cost, Quantified
Abstract risks are easy to dismiss. Dollar figures are not.
Consider a hypothetical $1 million portfolio invested in a target date 2025 fund — one of the most widely held retirement vehicles in America — beginning in February 2015. Over the following ten years, through February 2025, that fund produced a cumulative return of approximately 64 percent, bringing the portfolio to roughly $1,638,900.
Over the same period, a diversified equity-oriented portfolio with an 80/20 stock-to-bond allocation produced a cumulative return of approximately 188 percent — bringing the same hypothetical $1 million to approximately $2,877,600.
The difference: $1,238,700.
That gap is not a loss. The target date fund did not lose money. It simply failed to capture the returns that were available to an investor with a longer effective time horizon and a higher tolerance for market volatility. The technical term is opportunity cost. The practical term is $1.2 million that was left on the table during one of the strongest equity bull markets in modern history.
Now consider that the investor in this example had a measured investor risk score of 67, indicating a genuine capacity and tolerance for meaningful equity exposure, while the target date fund carried a risk score of 38. The 29-point gap between what the investor could bear and what the fund delivered was never identified, never discussed, and never corrected. No one in the 401k ecosystem was responsible for surfacing it.
When the appropriate risk-matched portfolio is modeled, one calibrated to a 67 investor risk score rather than the 58-risk 80/20 approximation used above, the opportunity cost grows larger still.
A Structural Gap with No Responsible Party
This situation is not the result of fraud or negligence by any individual actor. It is the predictable outcome of a system in which no one bears responsibility for matching the instrument to the investor.
The employer selects a menu of investment options and typically designates the target date fund as the default. The fund company manages the glide path according to its published methodology. The Department of Labor has blessed target date funds as qualified default investment alternatives. Regulators require disclosure of the glide path but not assessment of whether it fits any individual participant.
The result is a chain of institutional actors, each acting within their defined role, producing an outcome that serves a statistical average while potentially failing the actual individual. In no other area of financial services would this be considered acceptable. A registered investment advisor has a fiduciary obligation to know the client. A target date fund has no such obligation, and no one else in the 401k chain fills that gap.
The mismatch runs deeper than risk tolerance alone. The fund’s glide path is calibrated to the target date — the assumed retirement year — not to the participant’s actual investment horizon. For a 65-year-old in good health, that horizon extends statistically to their mid-eighties or beyond. An investor with meaningful post-retirement income sources — Social Security, a pension, rental income, or a working spouse — may have no need to draw on their portfolio for a decade or more after retirement. Their effective investment horizon is not 2025. It may be 2040 or 2045. The fund does not ask. The 401k plan does not ask. And the difference, compounded over twenty years, is not trivial.
What would change the outcome? Two things: knowing your investor risk score and comparing it to the risk score of your actual portfolio. If those numbers are significantly misaligned, the opportunity cost is not theoretical. It is calculable, in dollars, over whatever time horizon you have remaining.
The Question No One Has Asked You
Target date funds now hold $4.8 trillion in assets, having grown 20.3 percent in a single year, with five firms controlling 80 percent of the market. This is not a niche product that unsophisticated investors stumble into. It is the dominant default retirement vehicle for the American workforce, endorsed by employers, blessed by regulators, and growing at an extraordinary rate. These funds have delivered reasonable nominal returns — approximately 7.3 percent annualized over the past 15 years — and they have done so with less volatility than a pure equity portfolio. For investors who would otherwise hold cash or make reactive, emotion-driven allocation changes, they represent a genuine improvement.
But “better than the alternative” is not the same as “right for you.”
The question that the target date fund industry has never asked its participants — and that the 401k system has no mechanism to ask — is straightforward: what is your risk score, and does your portfolio reflect it?
If you do not know your investor risk score, you cannot answer that question. If you cannot answer that question, you cannot know whether the gap between what your portfolio is doing and what it could be doing has a dollar value attached to it.
The barrier is rarely ignorance. As explored in an earlier piece on this page, it is inertia — a well-documented human preference for the familiar that keeps investors anchored to the default long after the default has stopped serving them. In the current environment — after 17 years of bull market conditions that have rewarded equity exposure and punished excessive conservatism — that question has rarely been more consequential. Complacency is not a risk management strategy. Neither is trusting that a fund named for the year you retire knows anything meaningful about you.
It knows the year. That is all.
Andrew Parrillo is the Managing Member of Parrillo Investors LLC, a fixed-fee-only registered investment advisor based in Williamsburg, Virginia. He is the author of Beat the Wealth Management Hustle. A risk assessment is available at parrilloinvestors.com.
[1] Morningstar Manager Research, “2026 Target-Date Fund Landscape,” March 2026.
[2] Risk scores referenced in this article are generated by Nitrogen Wealth (nitrogenwealth.com), a portfolio analytics platform that incorporates prospect theory in its risk assessment. A 67-risk score compares to the S&P 500 risk of approximately 72. A portfolio allocated at approximately 80% S&P 500 and 20% Bloomberg Aggregate Bond Index has a risk score of approximately 58, and one with 95% S&P 500 and 5% Bloomberg Aggregate Bonds would have a risk score of 67.