Millennials born in the early 1980s to mid-1990s are beginning to enter middle age and their peak earning years. This generation, which entered the workforce around the time of the Great Recession and has since faced barriers that include a hefty student loan debt burden and the disruption of the COVID-19 pandemic, may experience many obstacles to retirement planning.

Indeed, more than a third of millennials say they are behind when it comes to saving for retirement. Fortunately, target date funds provide a helpful and convenient option for many who may otherwise find retirement planning to be daunting.

Introduction to Target Date Funds

Target date funds, also known as life-cycle funds, aim to manage risk on behalf of investors to ensure that their retirement savings are protected as the date of retirement approaches. These funds are typically labeled by the intended year of retirement—such as a “2055 Fund”—and use what is known as a glide path to shift exposure from higher-risk, potentially higher-reward assets to lower-risk ones over time.

Target date funds are usually mutual funds holding a combination of stocks, bonds, and other investments. Over time, the managers of these funds shift the allocation of these various asset types toward a more conservative approach; for instance, from a more stock-heavy portfolio when retirement is still decades away to a fixed-income or cash-equivalent-heavy portfolio in the final years before retirement.

A goal of these funds is to bet on relatively riskier assets earlier in the investor’s career, in order to capitalize on the possibility of higher returns and when there is still time to recover from potential market declines. Then, as retirement nears, a target date fund works to protect the investments accumulated over time from sudden market volatility or other factors that might erase returns at the last minute.

Benefits of Target Date Funds for Millennials

Target date funds offer a variety of advantages for millennial investors interested in saving for retirement. These include:

• Automatic asset allocation: Target date funds remove all of the work in managing risk from the investor. You simply contribute to the fund, and the fund managers automatically shift the asset allocation over time in line with the overall goals of the fund and the intended retirement date. For millennials who may not have the time or interest to participate actively in the investment process, this makes target date funds an excellent choice.
• Simplification: Because target date funds tend to be broadly diversified mutual funds, they can be considered a single investment vehicle for millennials planning for retirement. Unlike individual stocks, bonds, exchange-traded funds (ETFs), or other assets, which investors may need to monitor, buy, and sell regularly, target date funds are extremely straightforward.
• Risk tolerance is factored in: Many target date funds allow investors to specify their relative level of risk tolerance and adjust the glide path accordingly. If you are comfortable with a greater level of risk, for example, then a higher percentage of the portfolio may be allocated to stocks.
• Long time horizon: By definition, target date funds consider a long time horizon when making allocations. The oldest millennials still have decades until retirement age, making these funds a strong choice given this time frame.

Risks and Considerations of Target Date Funds for Millennials

It’s important to be aware of some risks and other considerations before you begin investing in a target date fund. These include:

• Misalignment of risk tolerance or investment goals: There is a risk of target date funds oversimplifying the retirement planning process for some investors. It’s important to consider the specifics of a fund—where does it invest funds, exactly how does it shift asset allocation over time, and so on—and compare those against your own level of risk tolerance and your financial goals.
• Fees: While it can be tempting to set up participation in a target date fund and put it out of mind, investors should also be aware that different funds may have fees that must be paid periodically. These may be for the fund itself or, occasionally, for other mutual funds in which the target date fund invests.
• No guarantee of success: Just because a target date fund is designed to adopt a more conservative approach as the investor approaches retirement is no guarantee that it will successfully protect retirement savings at that point.
• Limited agency: By choosing a target date fund, investors remove the option of controlling aspects of an investing approach, which may be important for some. If you have a particular focus—say, you wish to invest only in stocks meeting certain environmental, social, and governance (ESG) metrics—you may not be able to specify that preference when using a target date fund. You may also wish to have a fund that is actively managed by a professional, even if you wish to take a hands-off approach. Increasingly, a variety of target date funds do incorporate these kinds of investing preferences and strategies, though you may have to hunt for them.

Factors to Consider When Choosing Target Date Funds

For millennials who have decided to use a target date fund, there are some key considerations to keep in mind before initiating an investment. The most important of these may be the target retirement date itself.

Other considerations include expense ratios of the fund and any constituent funds, overall fund performance (particularly as it compares to other target date funds operating on the same time frame), and which funds are available through your particular investment manager.

Comparing Target Date Funds to Other Investment Options

Millennials planning for retirement may weigh target date funds against other investment options, such as individual stock investments, robo-advisors, and traditional retirement accounts. The choice often comes down to how actively the investor wishes to participate.

Index funds and related products are somewhat more involved, as investors will need to determine which funds to focus on and how to allocate them over time.

Individual stock investments represent the opposite end of the spectrum and appeal to investors looking to be more actively involved in determining how their money is allocated.

One popular alternative to target date funds for investors with decades until retirement is to focus on a growth fund instead.

, a financial planner for Lighthouse Financial in Arkansas, points to a case in which a millennial might choose between a target date fund and large-cap growth fund or S&P 500 index fund. Kennedy notes that most target date funds “range from 0.5% all the way up to 1% or more” in internal costs, while growth funds might cost “below 0.1%.” A typical expense ratio for an index fund may be 0.1%, although some are much lower.

A millennial investor with retirement decades away may “opt for a growth-oriented investment mix for the foreseeable future,” Kennedy says, making one of those growth funds a comparable option to target-date funds over the short term. He adds that a millennial considering between the two may “have a much better opportunity to outperform their respective target date fund opting for a simple growth fund” until it comes time to shift to a more conservative allocation many years down the line.

Case Studies: Millennials and Target Date Funds

Growth funds may be more attractive for some millennials planning for retirement, but for other millennial investors, the convenience of a single target date fund is worth the extra cost, particularly for target date funds with low fees.

Here’s another example: a 36-year-old millennial working in healthcare and planning to retire in 2055. Between a variety of work and personal obligations, she has neither the time nor the expertise to feel confident taking a more active approach to retirement. Finding a low-cost target fund through Vanguard allows her the peace of mind to know that her retirement funds will be cared for by a professional without her having to take on any additional responsibilities beyond making contributions.

Common Misconceptions About Target Date Funds

A common misconception about target date funds is that funds with the same target date but offered by different providers are the same. On the contrary, individual target date funds will hold different allocations of assets and the assets themselves are likely to also be different. For example, in most cases, a target date fund offered by a particular provider will include mutual funds only offered by the same provider, while others will hold a variety of U.S. equity, foreign equity, and bond funds offered by the same provider. Another misconception about target date funds is that the allocations will be changed frequently. As Kennedy points out, most millennials can select a growth fund and make “updates to the investment mix...as retirement approaches in 20 to 30 years.” The impact of not changing asset allocations significantly in the short term may be minimal, particularly considering the relative cost difference between growth and target date funds. Most investment management firms offer target date funds. Besides Vanguard, Fidelity, and T. Rowe Price, others include TIAA, BlackRock, State Street, JPMorgan Chase, and many more. The top target date fund for you may depend on whether you have a preference among these and other fund managers. Beyond that, millennials are likely to look at target retirement dates of roughly 2045 through 2060, so choosing a fund with the appropriate time horizon is essential. Next, it will be helpful to consider expense ratios across different comparable funds, as well as the assets that make up the portfolio and how you might expect them to shift over time.

The Bottom Line

Target date funds begin with a higher concentration of riskier assets like stocks and shift toward a more conservative approach as a target retirement date approaches. These funds may appeal to millennial investors for their ease of access, as they allow investors to make contributions and leave the rest of the fund management process up to professionals. However, they tend to have higher expense ratios than growth index funds, which may provide a similar performance and risk level for much of an investor’s career.