I’ve written several posts on Target Date Funds for this blog. I have mixed feelings about them. On the one hand TDFs do
provide investors with a professionally managed all-in-one investment solution. Ideally you invest in the fund with a target date closest to your anticipated retirement date and the fund does the rest. The manager typically lightens up on equities over time until the fund reaches its Glide Path into retirement, which is a point where the equity allocation levels off and you “glide” into retirement.
This is great in theory, but the reality is that across various fund families TDFs with the same target date can vary widely in their allocations and as to when the Glide Path starts. Personally I like TDFs more for younger investors versus those who are within say 15 years or so of retirement. Target Date Funds have become a staple in 401(k) plans due to the safe harbor given to plan sponsors who use them as the default investment choice for those plan participants who do not make an election of their own.
Fidelity, T. Rowe Price, and Vanguard control about 80% of the TDFs assets. Let’s take a look under the hood at the Vanguard Target Retirement funds.
Vanguard offers funds with target dates beginning in 2010 and going out to 2060 in five year increments. Additionally they offer an Income version of the fund for those already in retirement.
Low Cost and Simple
Vanguard’s approach is both simple and low cost. The underlying funds consist mostly of Vanguard’s low cost index funds. The overall expense ratio of the funds is a weighted rollup of the underlying funds and currently ranges from 0.17% to 0.19%. This is far less expensive than either Fidelity or T. Rowe Price and each of the Vanguard funds ranks in the top (lowest expense) percentile of their respective peer categories.
- Each of the funds from the 2010 through the 2050 fund received a top ranking from Fi 360 a mutual fund and ETF ranking service that I utilize in their most recent rankings through the quarter ended September 30, 2012.
- The Retirement Income fund received a score of 6 from Fi 360 meaning that it ranked in the top 6% of the 211 funds in its category based upon the 11 ranking criteria used by the service.
- The 2055 and 2060 funds do not have enough history to receive a ranking.
Glide Path and Asset Classes
Vanguard uses 7 asset classes in its TDFs; Fidelity uses 11; T. Rowe Price uses 12. This is not good or bad, but does reflect Vanguard’s more basic approach.
Vanguard’s Glide Path levels off at age 72; Fidelity’s at age 80; T. Rowe Price’s at age 95. The Glide Path assumes that the investor will hold the fund until death; this may or may not be the case in reality.
Are Target Date Funds the Right Answer?
As mentioned above, I have mixed feelings. On the one hand TDFs are often a better solution than simply letting one’s retirement plan assets languish in a money market account. On the other hand I am convinced that investors who are either comfortable doing their own allocation or who utilize an advisor are generally better served by tailoring an allocation from among the menu of investment choices offered in their 401(k) plan.
As far as Target Date Funds go, I generally like the Vanguard version for their basic, easy to understand approach and their low cost.
Please feel free to contact me with questions regarding your investments and your retirement planning issue.
Photo credit: Flickr