As Americans increasingly rely on 401(k) plans to fund their retirement, understanding the nuances of these accounts — including mutual funds and target date funds — has become essential to long-term financial security.
Suze Orman, a leading voice in personal finance, has issued pointed advice about how workers should approach 401(k) investing, including a strong warning about the risks embedded in target date funds.
The Internal Revenue Service (IRS) explains that traditional 401(k) contributions are made with pre-tax dollars, reducing taxable income today but resulting in taxable withdrawals during retirement.
Roth 401(k) contributions, by contrast, are made with after-tax income and allow for tax-free withdrawals later.
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In 2025, workers under age 50 can contribute up to $23,500 annually, while those 50 and older may add a $7,500 catch-up contribution, totaling $31,000.
Workers aged 60–63 will be eligible to contribute up to $34,750 annually. Orman emphasizes that maximizing these limits can significantly boost retirement readiness, especially when compounded over time.
She also urges savers to scrutinize target date funds, which she believes may not offer the personalized risk management many investors assume they do.
Suze Orman warns Americans on target date funds in 401(k)s
Orman cautions workers about target date funds, which are common in 401(k) plans and are designed to reduce risk in the years leading up to retirement. Generally, that reduced risk means increasing bond allocations in place of stocks later in one’s career.
“You have to make sure that your money works hard for you,” Orman said in a recent episode of her Women and Money podcast. “And just putting it in a target date retirement account in most cases make no sense. Why? You don’t invest according to age, everybody. You invest according to what’s happening in the economy.”
Orman discussed scenarios where investing in bonds does — and does not — make sense.
Do you want all your money in the stock market if the economy is going down? Maybe you want more in bonds, especially if you know that interest rates are high and they’re going to come down. There are times for bonds. There are times for everything. But that’s dictated by what’s happening in the economy. And just because you’re older, depending on your own financial circumstances, doesn’t mean that therefore all the money in your retirement account should be in bonds. And that’s possibly what would happen to you if you put the money in a target date retirement account because as you get older to that date, they take you out of the stock market and put you more and more and more into bonds.
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Why Suze Orman urges caution with target date funds
Target date funds are often marketed as a “set-it-and-forget-it” solution for retirement investing, automatically adjusting asset allocations based on a projected retirement year.
Orman warns that these funds may oversimplify complex financial needs. Many target date funds rely heavily on international equities, which have underperformed U.S. stocks for more than a decade.
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Orman said target date funds have shown limited downside protection during market volatility.
During the 2008 financial crisis, some 2010 target date funds lost up to 40% of their value, despite being marketed as low-risk options for near-retirees.
In 2022, funds designed for those already in retirement fell more than 11%. These outcomes suggest that target date funds may not deliver the stability investors expect, particularly in turbulent markets.
Orman advises investors to consider building their own diversified portfolios using low-cost mutual funds tailored to their individual risk tolerance and retirement timeline.
Key facts about 401(k)s and retirement savings, investments
- The IRS allows workers under 50 to contribute up to $23,500 annually to a 401(k) plan in 2025.
- Workers aged 50 and older can add a $7,500 catch-up contribution, totaling $31,000.
- Those aged 60–63 will be eligible to contribute up to $34,750 annually.
- Roth 401(k) contributions are made with after-tax dollars and allow for tax-free withdrawals.
- Target date funds have underperformed the S&P 500 and balanced portfolios over the past 28 years.
- Expense ratios for target date funds average 0.51%, compared to 0.04% for some index funds.
- During the 2008 crisis, some target date funds lost up to 40% of their value.
- In 2022, 2020 target date funds fell more than 11%, despite being designed for retirees.
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