Target-date funds have underperformed the S&P 500 by an average of 2.4% annually over nearly 30 years, and the numbers for 2026 are worse than most investors realize. In the first quarter alone, the majority of target-date funds suffered losses exceeding 1%, while more conservative, diversified glidepaths gained over 2% during the same period. For someone who invested $500,000 in a typical target-date fund at retirement, that 2.4% annual drag translates to hundreds of thousands of dollars in lost wealth over a 25-year retirement.
The gap has widened even as the industry has grown explosively. Target-date assets surpassed $4.8 trillion by the end of 2025, up 20.3% from the prior year. With five large providers controlling roughly 80% of all target-date assets and Vanguard alone managing $1.8 trillion, the question is no longer whether target-date funds are popular—it is whether they deserve the trust placed in them. Recent litigation alleges “consistent material underperformance” of these funds versus available alternatives, and warnings from leading experts suggest the next market downturn could expose vulnerabilities that have been hidden during the recent bull market.
Table of Contents
- Why Are Target-Date Funds Underperforming So Consistently?
- The Cost Structure Hiding in Plain Sight
- The Sequence of Returns Risk That Most Investors Don’t Understand
- Comparing Target-Date Funds to What You Could Build Yourself
- The Litigation Wave That Signals Deeper Problems
- The International Equity Anchor That Keeps Dragging Performance Down
- What the 2026 Numbers Forecast for Future Downturns
- Conclusion
Why Are Target-Date Funds Underperforming So Consistently?
The underperformance of target-date funds stems from structural design choices that favor simplicity and cost reduction over returns. The largest players, including Vanguard and Fidelity, allocate at least 30% of their target-date portfolios to international equities. This would be reasonable if international markets had kept pace with U.S. stocks, but they have not. U.S.
equities have outperformed international equities for nearly 15 years, turning what should have been a diversification benefit into a drag on performance. A retiree who followed the standard glidepath in a major target-date fund has unknowingly carried a significant international headwind throughout the period when it mattered most—the years leading up to and following retirement. Beyond geographic allocation, the funds’ passive indexing approach leaves no room for tactical adjustments. When valuations become stretched or economic warning signs appear, target-date funds continue buying and holding without consideration of relative values. During early 2026, most target-date funds held heavy positions in both equities and bonds, leaving them vulnerable when both asset classes weakened. Investors who believed their target-date fund’s glidepath would protect them from losses found instead that their carefully chosen retirement vehicle delivered worse results than simple, alternative portfolios managed with more flexibility.
The Cost Structure Hiding in Plain Sight
While expense ratios have fallen—from 0.55% in 2015 to 0.27% in 2025—this improvement masks a deeper problem: excess costs relative to available alternatives. In 2019 alone, target-date fund investors paid $8.6 billion more in total excess costs than they would have paid if their money had been placed in lower-cost alternatives available at the time. Those dollars are gone forever, and they represent real retirement purchasing power lost for millions of households. The fee compression is partly real progress from competition, but it obscures the impact of funds’ underlying component selections.
When a target-date fund holds 30% in international equities that underperform, that allocation decision is not captured in the headline expense ratio. The true cost to investors is the 2.4% annual gap between what they earned and what a better-allocated portfolio would have earned. For a $1 million portfolio, that is $24,000 per year in lost wealth creation. Over 20 years, that compounds into hundreds of thousands of dollars of foregone retirement security.
The Sequence of Returns Risk That Most Investors Don’t Understand
Sequence of returns risk refers to the danger that major market downturns occur early in retirement, forcing retirees to withdraw from depressed portfolios and lock in losses. Target-date funds, by design, are supposed to manage this risk by shifting toward bonds as investors approach retirement. Yet experts warn that target-date funds do not adequately defend against this risk. The very allocation that seemed safe in 2024 and early 2025 may prove catastrophic in the next bear market. When the next significant market downturn arrives—and market history suggests it will—a retiree holding a typical target-date fund faces a specific vulnerability.
The 30% allocation to underperforming international equities means greater losses when global equities fall. The bond allocation, which has been declining in yield value as rates have risen, offers less cushioning than it should. Experts predict that “Boomers in target-date funds will be hardest hit in the next crash,” and litigation experts warn that a severe downturn could trigger suits similar to those filed after 2008, when target-date funds posted 30-40% drawdowns. The next scandal may not arrive during the next bull market. It arrives during the next crash.
Comparing Target-Date Funds to What You Could Build Yourself
A retiree who assembled their own portfolio could invest in a combination of low-cost index funds, individual bonds, and dividend-paying equities, allocating based on their specific timeline and risk tolerance rather than accepting the one-size-fits-all approach of a target-date fund. During the first quarter of 2026, the best-performing target-date alternatives—those that reduced equity exposure and diversified more broadly—returned over 2% while most standard target-date funds lost more than 1%. That 3+ percentage point difference in a single quarter, if repeated, would compound into enormous wealth differences over a retirement.
The trade-off is real: building your own portfolio requires some financial knowledge and ongoing attention, whereas a target-date fund can be set and largely forgotten. For someone with $3 million in retirement assets, however, the cost of that convenience is enormous. A self-directed approach costs only the time spent rebalancing (or a modest fee to a financial advisor), whereas the target-date fund’s structural underperformance will cost that retiree six figures over retirement. The simpler path—the one marketed as safer and more appropriate for busy professionals—may be the most expensive retirement decision a person makes.
The Litigation Wave That Signals Deeper Problems
Lawsuits alleging “consistent material underperformance” against target-date funds have accelerated sharply in 2026, described by litigation experts as a “tsunami of recent 401(k) underperformance suits.” These cases argue that plan fiduciaries had better alternatives available yet continued offering target-date funds that chronically underperformed. The legal arguments resemble those that succeeded in post-2008 litigation, when defendants settled by agreeing to reduce expenses and improve performance monitoring. What makes this litigation wave significant is that it signals a problem that has now become visible to courts and regulators.
Plan sponsors and fiduciaries have begun asking harder questions about whether they have a duty to monitor target-date fund performance more rigorously and replace underperforming options. American Century, a major target-date fund provider, experienced net outflows of $4 billion in 2024—representing 19% of their assets under management—suggesting that some investors have already lost confidence. The question is not whether the litigation has merit; the question is whether it will drive meaningful changes before the next market downturn makes the problems worse.
The International Equity Anchor That Keeps Dragging Performance Down
The decision to hold 30% or more of a target-date portfolio in international equities has become the single largest structural drag on performance. This allocation made sense in the 1990s when international markets were cheaper and more dynamic than the United States. That has not been true for 15 years. A $1 million portfolio allocated 30% to underperforming international equities costs the investor approximately $240,000 in foregone gains per year relative to what a 100% U.S. equity approach would have generated.
Vanguard and Fidelity justify the international allocation on diversification grounds, arguing that it reduces home-country bias and provides exposure to global economic growth. Yet global economic growth has been concentrated in U.S. technology and financial companies. An investor who wanted exposure to global growth has received it most efficiently through U.S. equities. The international allocation in target-date funds appears increasingly like a historical legacy—a decision made decades ago that has calcified into policy despite evidence that it no longer serves investors well.
What the 2026 Numbers Forecast for Future Downturns
The underperformance revealed in early 2026 offers a preview of how target-date funds will behave in more severe markets. If a 1-2% quarterly decline in broader equity and bond indices translates into losses exceeding 1% for target-date funds while better-structured alternatives gain, imagine what a 20-30% bear market will look like. Experts explicitly warn that the “next 401(k) scandal” could unfold if a significant market downturn exposes the glidepath vulnerabilities embedded in mainstream target-date funds, potentially triggering litigation similar to post-2008 suits and raising questions about whether fiduciaries adequately monitored these investments.
The asset base has grown to $5.2 trillion when including custom target-date strategies, but growth does not equal safety or performance. As the baby boomer generation transitions from accumulation to distribution—drawing down retirement funds precisely when they are most vulnerable to sequence-of-returns risk—the flaws in target-date fund architecture will become increasingly consequential. The next few years will likely determine whether target-date funds remain the default retirement solution or whether regulators, courts, and fiduciaries demand meaningful structural changes.
Conclusion
Target-date funds have underperformed the broader market by 2.4% annually over 30 years, and 2026 is revealing why: a combination of persistent international equity overallocation, a cost structure that still exceeds available alternatives despite lower headlines fees, and a one-size-fits-all design that fails to account for individual risk tolerance or timeline. For investors approaching or in retirement, these gaps are not theoretical—they represent hundreds of thousands of dollars in lost wealth.
The time to evaluate whether your target-date fund is actually serving your retirement is now, before the next market downturn exposes vulnerabilities that may already be baked into your portfolio. Whether that means shifting to a different fund, building a custom portfolio, or working with a financial advisor to construct a more robust retirement allocation, the data from 2026 suggests that passive acceptance of a target-date fund’s design is no longer a defensible retirement strategy.