The “retirement savings vehicle of choice for Americans” just reached a towering new height.
Target-date fund assets soared to a record $4 trillion in 2024, according to Morningstar’s new “Target-Date Fund Landscape” report.
“That’s an enormous number, and people may have a hard time grasping the magnitude of that,” Janet Yang Rohr, Morningstar’s director of multi-asset and alternative strategies, and lead author of the report, told Yahoo Finance.
“These funds are basically the retirement savings vehicle of choice for Americans. When these funds started, roughly 15 years ago, it wasn't really obvious that these were going to be as important as they are.”
Now, nearly all 401(k) plan sponsors and most state auto-IRA programs use target-date funds when they automatically enroll workers in a retirement plan. In fact, their dominance stems in many ways from that default status for new contributors to 401(k) plans.
“Retirement plan sponsors and the government took a leap of faith on (target-date funds) and allowed these to be the default investment for many retirement plans,” Rohr said. “And by doing that, money basically poured into these funds, and they have done really well for investors.
“It's been a win-win for everyone.”
Read more: How much should I contribute to my 401(k)?
With a target-date retirement fund, you choose the year you’d like to retire and buy a mutual fund with that year in its name (like Target 2044). The fund manager then allocates your investment between stocks and bonds, typically made up of index funds, tweaking that to a more conservative mix as the target date nears.
Many people simply pick the year they’ll reach their full Social Security retirement age as the bulls-eye. For most of us, that’s 67. If you have a higher risk tolerance, you might go with a later date for a more aggressive mix, meaning a higher exposure to stocks, or an earlier one if you lean conservative.
Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals?
Target-date mutual fund portfolios that primarily hold index funds have lower costs than those that are actively managed. Their average expense ratio is 0.26% compared to an average expense ratio of 0.79% for primarily active-based target-date funds and 0.58% for those that use a mix, according to Morningstar data. (At the other end, Vanguard’s popular S&P 500-tracking index fund has an expense ratio of just 0.04%.)
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The expense ratio fee, which includes management, marketing, sales, and other costs, is deducted from your investment returns. For most of us, that may well be a price worth paying.
“Target-date funds help 401(k) participants invest with an age-appropriate allocation and automatically rebalance,” David Stinnett, head of strategic retirement consulting at Vanguard, told Yahoo Finance.
Savers “navigating uncertain markets may find peace of mind in knowing that their portfolios are well-diversified within and across asset classes and are built for long-term investing goals like retirement — in many cases, without having to lift a finger,” he said.
Investing in a target-date fund “is one of the easiest things that you can do for yourself,” Rohr added. “I invest in these, too, because I don't have time to change my allocations when markets change.”
The love affair with these funds is rampant. At Vanguard, for example, last year more than 8 in 10 of participants in its 401(k) accounts used target-date funds. About two-thirds of all 2024 contributions from the 5 million people in 401(k) plans went into these funds — an all-time high, according to Vanguard’s “How America Saves 2025” report.
If you're one of the record number of Americans turning 65 this year, invested in a Target 2025 fund 15 years ago when they first entered the mainstream, and kept investing whether markets went up or down, well done.
The average annualized returns for all the 2025 target-date funds that existed throughout this time was 7.3% through the end of 2024, far surpassing expectations of 6.3% over the past 15 years, per Morningstar data.
From the market’s 2025 peak on Feb. 19 through its low on April 8, the S&P 500 (^GSPC) lost 18.6%. Over that period, the target-date 2025 Morningstar Category average lost 7.6%.
In Morningstar’s model scenario, a retirement account investor was age 50 in 2010 and had been in the workforce for almost three decades, made about $75,000 in annual salary that kept up with an annual inflation rate of 2%, saved 7% per year in the target-date fund, and had a retirement nest egg of about $300,000 to start.
Those 2025 Target funds did the job they were supposed to do, Rohr said.
“All of that together made for a great formula for success for these investors,” she said. “And so now these workers are in a good spot for retirement.”
Remember how jangly you felt a few weeks ago when you looked at your sinking 401(k) balance?
In the last month, the discipline of investing in target-date funds stands out.
“When you have all the volatility that we've seen, then you really see why you need to diversify,” Rohr said.
Year-to-date losses for the S&P 500 through May 7 stand at 3.9% versus a gain of 1.8% for the typical target-date 2025 fund and a gain of 1.4% for overall target-date funds, according to Morningstar data.
“People in these diversified funds saw losses, too, let's not gloss over that, but it was much lighter and much more tolerable,” she said.
And let’s be honest, diversification isn't always easy for the average saver who doesn't manage money every day.
“Target date funds are not necessarily magic — there's no magical wand here — but the reason why they work is because people use them and save in them regularly,” Rohr said.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming "Retirement Bites: A Gen X Guide to Securing Your Financial Future," "In Control at 50+: How to Succeed in the New World of Work" and "Never Too Old to Get Rich." Follow her on Bluesky.
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