I spend a lot of time on this site talking about three fund portfolios, individual ETFs, and optimizing allocations. And I stand behind all of that — for the right person, building your own portfolio with low-cost index funds is a great approach. But I want to be honest about something: that right person is probably not the majority of investors. For most people, a target date index fund is not just good enough — it's genuinely the best choice available to them.
Let me explain why I believe that, and why the one decision that actually matters is which version you buy.
What a Target Date Fund Actually Does
A target date fund is a single fund that holds a diversified mix of stocks and bonds and automatically adjusts that mix over time as you approach retirement. You pick the fund that corresponds to the year you plan to retire — a 2050 fund if you're planning to retire around 2050, for example — and the fund handles everything else.
When you're young and your retirement is decades away, the fund is heavily weighted toward stocks for growth. As you get closer to your target date, it gradually shifts toward bonds and more conservative holdings to protect what you've built. That shift is called a glide path, and with a target date fund you never have to think about it. The fund executes it automatically.
There's no rebalancing to do. No allocation decisions to revisit. No spreadsheet to maintain. One fund, one decision, done.
Why This Works for the Vast Majority of Investors
Here's the honest reality: most people do not want to get into the weeds of investment allocation. They don't want to research the difference between VTI and VXUS. They don't want to think about what percentage of their portfolio should be in international stocks. They don't want to remember to rebalance once a year. And that's completely fine — there is nothing wrong with that. Personal finance content can make it easy to forget that the average person has a job, a family, and approximately zero interest in spending their evenings optimizing a three fund portfolio.
For those people, the target date fund is not a consolation prize. It's the right tool for the job.
The automation alone is worth a lot. A three fund portfolio that never gets rebalanced because life got busy drifts from its target allocation over time. A target date fund never drifts because it handles everything internally. The behavioral advantage of a set-it-and-forget-it structure is real and meaningful over a 30 or 40 year investing horizon.
The Spouse Consideration
This is something I don't see talked about enough. If you have a spouse or partner who is not engaged with your investment decisions — and a lot of households have exactly this dynamic — a target date fund is a powerful form of financial planning that goes beyond just returns.
If something were to happen to you, would your spouse know how to manage a portfolio of individual funds? Would they know when to rebalance, how to adjust the allocation as retirement approaches, or even which accounts hold which funds? For many people the honest answer is no, and that's not a criticism — it's just reality.
A target date fund removes that concern entirely. There's nothing to manage. The fund does what it's supposed to do regardless of who is watching it. That kind of built-in resilience has real value that doesn't show up in any performance comparison.
The One Decision That Actually Matters: Index vs. Actively Managed
Here's where I have to be emphatic: if you're going to use a target date fund, you need to buy the index fund version, not the actively managed version.
Most major fund families offer both. Vanguard's Target Retirement funds, Fidelity's Freedom Index funds, and Schwab's Target Date Index funds are all index-based and come with very low expense ratios — often 0.10% to 0.15% per year. Their actively managed counterparts can charge 0.50% to 0.75% or more annually.
That gap compounds into a significant amount of money over time. On a $200,000 portfolio, the difference between a 0.12% and a 0.65% expense ratio is roughly $1,060 per year in fees. Over 20 years that's tens of thousands of dollars that stayed in someone else's pocket instead of yours.
And here's the other part: actively managed funds don't reliably beat index funds over the long term. Study after study over decades has shown that the majority of actively managed funds underperform their benchmark index after fees. You're paying more for results that are likely to be worse. The index version wins on both cost and performance probability.
Always check the expense ratio before you buy. If it's above 0.20% for a target date fund, look for the index version of the same fund family.
Are You Leaving Returns on the Table?
The honest answer is: maybe, but probably not by as much as you'd think — and it's not guaranteed either way.
I've actually tested this myself. Over the past two years I've been running a comparison between a target date index fund and my own three fund portfolio in a separate account. The result? The target date fund outperformed my three fund setup more than half the time. Not by a huge margin, but it beat it more often than it lost.
Now, two years is a short window and that won't always be the case. The three fund approach gives you control over your U.S. versus international allocation which is a real advantage if you have strong views on that. But the idea that building your own portfolio of index funds is a guaranteed improvement over a target date fund — that's just not supported by the actual data. The gap, if it exists, is smaller than the personal finance internet would have you believe.
For most people the energy spent optimizing that gap would be better used elsewhere. Earning more income, spending less, increasing your contribution rate — those levers move the needle more than shaving a fraction of a percent off your expense ratio or tilting your international allocation by 5%.
The Bottom Line
Target date index funds are not the beginner option you graduate out of. For the vast majority of investors they are a completely legitimate long-term strategy that removes the main ways people hurt themselves — inaction, drift, emotional decisions, and neglected rebalancing.
Pick the year closest to when you plan to retire. Buy the index fund version with the lowest expense ratio you can find. Automate your contributions. Leave it alone.
That's it. And honestly? For 99% of people that approach will get them where they need to go.
Disclosure: This article reflects the personal opinions of the author and is not financial advice. We are not licensed financial advisors. All investing involves risk including the potential loss of principal. Past performance is not indicative of future results. Always do your own research before making investment decisions.