Target date fund vs three-fund portfolio in a 401(k)
Educational only, not financial advice. This guide explains general concepts. It does not consider your situation. Check your plan documents and consider a qualified, fee-only professional before acting.
Both approaches hold broadly diversified stocks and bonds. The difference is who does the maintenance.
| Target date fund | Three-fund portfolio | |
|---|---|---|
| Number of funds | One | Three |
| Rebalancing | Automatic | You do it |
| Gets more conservative over time | Yes, on a set glide path | Only if you change it |
| Control over the mix | Low | High |
| Cost | Index versions are often cheap; active versions can cost more | Usually very low if index funds are available |
When a target date fund fits
It suits people who want a hands-off approach and are comfortable with the fund's glide path. Check whether it is an index target date fund (names often include "Index") and its expense ratio.
When three funds fit
It suits people who want to set their own stock/bond split, coordinate with other accounts, or whose plan's target date funds are expensive.
A common mistake
Holding a target date fund alongside other funds undoes its built-in allocation. Many people pick one approach per account.
Look up your plan to see the index funds its filings show.