Forget Target Date Funds. Here's a Better Way to Invest Your 401(k).

If you signed up for your company's 401(k) but never actually logged into your account to choose your investments, then chances are, your money is in a target date fund. These funds are often the default investment option for 401(k) savers, and it's easy to see why.

With a target date fund, there's no work to do on your part. Based on your estimated retirement age, a fund like this will have you invested more aggressively during the wealth-building stage of your career. Then, as retirement nears, you'll be shifted into more conservative assets, like bonds and maybe even some cash, to minimize your risk.

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It's a very appealing option to fall back on. But target date funds have some serious flaws you should know about.

The problem with target date funds

A target date fund might seem like your easiest option for putting your 401(k) to work, especially if you don't consider yourself a particularly savvy investor. The problem with target date funds, though, is that they tend to err on the side of investing conservatively -- not just when you're getting close to your target retirement date, but in general. That could lead to lower returns in your 401(k), and a smaller ending balance.

Another issues with target date funds is that the fees associated with them tend to be on the high side. Vanguard says the average target date fund has an expense ratio of 0.44%. That's not so terrible, but for some target date funds, that number can exceed 1%. It's important to see what fees your plan's target date fund is charging.

A better alternative

Many financial experts will tell you that a target date fund is a perfectly appropriate retirement investment. But if you want an equally easy way to invest your 401(k), you may want to look at broad market index funds instead -- for example, S&P 500 index funds.

The nice thing about index funds is that they're passively managed, which allows them to keep their expense ratios low -- lower than what you'll typically find with a target date fund. Also, while index funds won't shift you away from riskier investments as retirement nears, they do allow you to invest in a diversified manner. Plus, with an index fund, you might enjoy stronger returns in your 401(k), leading to more savings for you.

Now if you're going to put your 401(k) into index funds, you may need to remember to check up on your asset allocation when retirement is about five years away and make some changes. In this regard, target date funds have an advantage because they'll do that for you. But if you're willing to do this small and very reasonable amount of legwork, you may find that ditching target date funds allows you to enjoy higher returns in your 401(k) without the costly fees that eat away at your savings.

And remember, you could always keep a portion of your 401(k) in a target date fund if that brings you peace of mind. That way, you're not limiting your savings' growth entirely, and you're looking at higher fees on just a portion of your total portfolio.

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