Not all individuals benefit from target-date funds, which are the most commonly chosen investment option in 401(k) plans.

• Retirement savers can utilize target-date funds, or TDFs, as a convenient all-in-one solution.
• One estimate predicts that they will capture approximately two-thirds of all 401(k) plan contributions by 2027.
• While simple, these investments may not be suitable for those with complex finances, according to advisors.

401(k) plans capture the majority of investor contributions through target-date funds, which allow participants to automate their retirement savings.

In 2023, the average 401(k) plan had 29% of its assets invested in TDFs, which is the largest category of funds, according to the Plan Sponsor Council of America. This represents an increase from 16% in 2014, as per PSCA data.

According to a 2023 estimate by Cerulli Associates, by 2027, TDFs will account for approximately 66% of all 401(k) contributions and about 46% of the total 401(k) assets.

Biden signs legislation to increase Social Security benefits for public workers.

The widespread use of TDFs as the default investment option in company 401(k) plans has contributed significantly to their popularity.

Financial advisors pointed out that although funds can bring advantages to many investors, they may also present challenges for some.

While target funds may be suitable for certain investors, they are not and should not be used by everyone, according to Winnie Sun, managing partner of Sun Group Wealth Partners in Irvine, California, and a member of CNBC's Financial Advisor Council.

How target-date funds work

Typically, financial experts suggest that as investors grow older, they should reduce the risk in their investments by moving from volatile holdings like stocks to more stable options like bonds and cash.

Based on an investor's estimated year of retirement, TDFs automatically adjust their asset allocation.

An investor who anticipates retiring in 30 years may opt for a 2055 fund.

As the retirement year approaches, the fund's asset allocation gradually becomes more conservative.

A one-stop shop for 401(k) savers

TDFs, or one-stop shops for 401(k) savers, are often praised by advocates for their simplicity.

Since the index fund, target-date funds have been the most significant positive development for investors, according to Christine Benz, director of personal finance and retirement planning at Morningstar, in June.

Benz wrote that important decisions like asset allocation and investment selection are "completely removed from investors' control."

TDFs are a cost-effective and practical option for individuals who cannot afford to hire an advisor and are more likely to make unconventional investment decisions, according to her. Additionally, TDFs discourage actions that can harm investor returns, such as buying and selling at inappropriate times, she stated.

Sun stated that these investments are intended to be simpler and more convenient for those who prefer a hassle-free approach.

There may be drawbacks

TDFs may not be suitable for some investors, particularly those with substantial savings outside their 401(k) plan or who prefer a more active investment strategy, according to advisors.

Although investors anticipate retiring at the same age, it does not necessarily mean that the same asset allocation is suitable for all of them.

Sun posed a question: "What if you're more conservative or prefer more aggressive tech investing, or socially responsible investments?"

Different asset managers employ varying investment philosophies, with some fund families being more aggressive or conservative than others.

Experts noted that employers typically provide TDFs from a single financial company, and the funds may not match an investor's risk profile.

Carolyn McClanahan, a certified financial planner and the founder of Life Planning Partners in Jacksonville, Florida, emphasized the importance of understanding the risks involved in a target-date fund.

According to McClanahan, a member of CNBC's Advisor Council, you might assume that a 2030 target-date fund would have a conservative allocation. However, most are 60% equities because they expect the funds to be drawn off over a long period of time.

By using a mix of index funds, investors may be able to create a less expensive portfolio, but this would require more effort from them, she stated.

McClanahan stated that TDFs do not allow for the tax location of different assets.

Strategically holding stocks and bonds in specific account types can increase after-tax investment returns.

Since investment earnings are generally tax-free in retirement, assets with potential for high growth are well-suited for Roth accounts, said McClanahan.

Tax-deferred or tax-exempt accounts are often recommended for holding many bonds and bond funds, according to experts.

Yes, a thousand times, target-date funds help unaware investors find a sane investment mix based on their life stage, despite certain shortcomings for some investors, according to Benz.