Educational content only. This article is for informational purposes and does not constitute personalized financial, tax, or investment advice. Consult a qualified professional for guidance specific to your situation.
TL;DR
- Target date fund first: The best pick for most people — just set your expected retirement year and forget it
- Under 0.15% expense ratio: That's the bar to clear in your 401K; avoid anything higher
- Top options: Schwab Target Index (0.08%), Fidelity Freedom Index (0.12%), Vanguard Target Retirement (0.08%)
Have high-cost funds in your 401K and not sure what to swap them for? Book a free 15-min call and I can help you identify the best options in your specific plan.
The simplest and best option for most people: a target date fund (TDF). These all-in-one investments automatically adjust as you get closer to retirement.
Why target date funds work so well:
- They provide instant diversification across U.S. stocks, international stocks, and bonds
- They automatically become more conservative as you approach retirement
- They prevent emotional decision-making that often hurts investment returns
- They require almost no maintenance - perfect for a "set it and forget it" approach
When you're younger and retirement is far away, target date funds hold mostly stocks to maximize growth potential. As you get closer to your target retirement date, they gradually shift toward more bonds to reduce risk. This shift is called a "glide path."
How a target date fund automatically shifts from stocks to bonds over time
Choosing a Target Date Fund in Your 401K
Your 401K will likely offer a limited selection of target date funds. Look for these three key features:
- Low cost: Choose funds with expense ratios under 0.15% (you pay $15 or less per year for every $10,000 invested)
- Global diversification: Make sure the fund includes both U.S. and international stocks
- No hidden fees: Avoid funds with transaction fees or sales loads
BlackRock LifePath Index Funds are commonly offered in 401K plans and generally meet these criteria.
Choosing a Target Date Fund in Your IRA
In an IRA, you have more freedom to choose any target date fund. The three major brokerages all offer excellent low-cost options.
Recommended target date funds:
| Brokerage | Fund Name | Annual Cost |
|---|---|---|
| Schwab | Schwab Target Index Funds | 0.08% ($8 per $10,000) |
| Fidelity | Fidelity Freedom Index Funds | 0.12% ($12 per $10,000) |
| Vanguard | Vanguard Target Retirement Funds | 0.08% ($8 per $10,000) |
Important: With Fidelity, make sure to choose "Fidelity Freedom Index Funds" and not the regular "Fidelity Freedom Funds," which are more expensive.
Glide paths are similar across major providers
How to Choose the Right Target Date
Target date funds are named by the year you plan to retire. For example, if you're planning to retire around 2050, you would choose a "2050" fund.
Want to adjust your risk level?
- More conservative: Choose a fund with an earlier date than your planned retirement (e.g., a 2045 fund if you plan to retire in 2050)
- More aggressive: Choose a fund with a later date than your planned retirement (e.g., a 2055 fund if you plan to retire in 2050)
The good news: all major target date funds have similar glide paths, so you don't need to worry too much about which provider you use. More details about glide paths are available in Morningstar's research.
Examples of Target Date Fund Names
- •Vanguard Target Retirement 2050 Fund
For someone retiring around 2050 - •Schwab Target 2040 Index Fund
For someone retiring around 2040 - •Fidelity Freedom Index 2060 Fund
For someone retiring around 2060
Have high-cost funds in your 401K and not sure what to swap them for?
I can help you identify the best low-cost options in your specific plan and build an allocation that fits your timeline. One-time consultation, no ongoing fees.
Book a Free 15-Min CallNext up
How Much Do I Need to Retire