When “Set It and Forget It” Backfires
You’ve been doing everything right—maxing out your retirement plan, investing early, and selecting a 2040 or 2050 target date fund that promised to do the heavy lifting for you. But lately, the numbers aren’t adding up. Your account is down more than expected, even compared to diversified portfolios with similar risk levels. What gives?
Welcome to the underbelly of target date funds—a strategy that’s algorithmically sound in theory but increasingly problematic in practice, especially during market turbulence.
In this post, we’ll break down what’s happening behind the scenes with target date funds, why they often underperform during periods of volatility, and what high-income professionals can do to take back control of their investment strategy.
The Problem with Target Date Funds No One Talks About
Target date funds (TDFs) are built on a simple premise: pick the year closest to your expected retirement date, and let the fund adjust your asset allocation over time. The idea is that the fund becomes more conservative—reducing equity exposure and increasing bond holdings—as you approach retirement.
But here’s what’s really going on:
- TDFs rely on preset algorithms that automatically rebalance your portfolio based on time, not market conditions.
- During downturns, these algorithms can lock in losses by selling equities after prices drop and reallocating into lower-yielding bonds.
- Instead of waiting out volatility, they react to it—mechanically, not strategically.
Real-World Impact
Let’s say your 2040 TDF is set to become more conservative every year. If the market drops 20% in the same year the algorithm is scheduled to shift you into more bonds, it rebalances regardless of whether that’s the best move for your long-term growth.
The result? You could be selling low, buying low-yield, and reducing your portfolio’s future growth potential—all because of a one-size-fits-all glide path that doesn’t account for real-world nuance.
A Better Approach: Strategic Asset Management
If you’re in your peak earning years and have a complex financial picture—equity compensation, rental income, Roth conversions, tax strategies—a hands-off algorithm just doesn’t cut it.
Here’s how to invest more intentionally:
- Use a dynamic rebalancing strategy: Instead of rebalancing on autopilot, shift your portfolio based on risk-adjusted returns, macroeconomic trends, or personal cash flow needs.
- Incorporate tactical tax planning: During downturns, you may want to harvest tax losses or reposition assets into Roth accounts. TDFs don’t allow for that.
- Align risk to your personal goals, not your birth year: Some 2040 funds have vastly different equity allocations than others. A custom portfolio allows you to choose risk based on your actual lifestyle and goals—not a glide path built for the masses.
Key Tax Considerations
- TDFs may rebalance in taxable accounts without regard to capital gains consequences.
- They don’t account for coordinated strategies like tax-loss harvesting or Roth conversions.
- If you’re holding a TDF in a taxable brokerage, you could be losing tax alpha unnecessarily.
What to Consider Instead
Let’s compare the pros and cons of TDFs vs. custom portfolios:
|
Approach |
Pros |
Cons |
|
Target Date Fund |
Easy, diversified, automatic |
Rigid, not tax-efficient, underperforms in downturns |
|
Custom Portfolio |
Personalized, tax-aware, strategic |
Requires planning and oversight |
Who Should Consider Moving Away from TDFs?
- Tech professionals with equity compensation and variable income
- High earners with complex tax needs
- Anyone within 10–20 years of retirement who wants control and optimization
If you have multiple income streams or a large portfolio, you’ve outgrown the simplicity of a target date fund. It’s time for strategy—not set-it-and-forget-it.
FAQs About Target Date Funds
Are target date funds good during a market crash?
Not typically. They often rebalance based on predetermined schedules, not current market conditions, which can lock in losses during a crash.
Why is my 2040 or 2050 target date fund underperforming?
Because it may be rebalancing into bonds at the worst time or holding too much in conservative assets for your actual goals. It’s not designed to be responsive to short-term market moves.
Should I move out of my target date fund?
If you have a complex financial life or want more control over your risk and tax strategy, a custom portfolio may be more effective. Work with a wealth advisor to assess fit.
Are all target date funds the same?
No. Even for the same target year, different fund companies use different glide paths, fees, and asset mixes. Two 2040 funds could perform very differently.
Can I have a target date fund in my taxable account?
You can, but it’s not ideal. TDFs can trigger capital gains and aren’t optimized for tax efficiency.
Take Control of Your Future
Target date funds were built for simplicity, not strategy.
For high-income professionals managing large portfolios, tax complexity, and multi-decade wealth goals, they often fall short—especially when markets get messy.
At Truly Aligned, we help clients move from passive algorithms to proactive strategy. We look at your total picture—equity compensation, taxes, goals, estate plan—and build a portfolio that adapts as you do.
If you’re ready to stop relying on outdated fund mechanics and start building true financial alignment, explore our Investment Management or Financial Planning services.
Let’s make your money work smarter—on your terms.
The principal value of a target fund is not guaranteed at
any time, including at the target date. The target date is the approximate date
when investors plan to start withdrawing their money.
There is no guarantee that a diversified portfolio will
enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax
liabilities and/or transaction costs and does not assure a profit or protect
against a loss.
Bonds are subject to market and interest rate risk if
sold prior to maturity. Bond values will decline as interest rates rise. Bonds
are subject to availability, change in price, call features and credit risk.
Stock investing includes risks, including fluctuating
prices and loss of principal.
Traditional IRA account owners have considerations to
make before performing a Roth IRA conversion. These primarily include income
tax consequences on the converted amount in the year of conversion, withdrawal
limitations from a Roth IRA, and income limitations for future contributions to
a Roth IRA. In addition, if you are required to take a required minimum
distribution (RMD) in the year you convert, you must do so before converting to
a Roth IRA.
Alpha measures the difference between a portfolio’s
actual returns and its expected performance, given its level of risk as
measured by Beta, which measures volatility relative to its benchmark. A
positive (negative) Alpha indicates the portfolio has performed better (worse)
than its Beta would predict.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through The Wealth Consulting group, a registered investment advisor. The Wealth Consulting group, WCG Wealth Advisors and Truly Aligned, INC are separate entities from LPL Financial.