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Not All Target-Date Funds Are Created Equal

By JLP | February 12, 2007

Unless you have had your head in the sand the last couple of years, you have probably heard about “Target-Date” portfolios. Target-date portfolios are essentially a basket of mutual funds with the allocation decided by number of years until the money is needed. Naturally, the further out the target-date, the more aggressive the portfolio. As you approach your goal, the portfolio automatically changes the allocation for you by transfering money from the stock portion into the fixed income portion of the portfolio.

What you gain in “freedom” you lose in “personality” as the one-size-fits-all approach to asset allocation doesn’t take in account personal risk tolerance. In other words, I may have a really high risk-tolerance and therefore may not want bonds in my portfolio. But, if I’m in the Vanguard 2040 Target Retirement Fund, nearly 10% of my funds will be invested in bonds:

Vanguard 2040 Target Retirement Fund

If I go with the Fidelity Freedom Freedom Fund 2040, I’ll have 15% of my portfolio allocated to fixed income:

Fidelity Freedom Fund 2040

And, if I go with the T. Rowe Price 2040 Retirement Fund, I’ll have 7.75% of my portfolio in fixed income:

T. Rowe Price 2040 Retirement Fund

The fees for the three portfolios mentioned above are reasonable. Vanguard’s is by far the lowest at just .21%, while Fidelity and T. Rowe Price each charge .76% (this includes the mutual fund fees). Be sure and read the prospectuses as the fees may be different depending on the target date.

So, if you want to save for retirement but don’t want to mess with your asset allocation each year and don’t mind having an allocation picked for you, a target-date fund might be right for you. Personally, I’m going to stick to doing it myself.

Topics: Investing, Retirement Planning | 8 Comments »


8 Responses to “Not All Target-Date Funds Are Created Equal”

  1. Ravi Says:
    February 12th, 2007 at 12:40 pm

    I am a big fan of Target-Date funds and have both my IRA and 401K allocated to these , I have been using them for the past 3 years , and granted these are not very long term trends, I am quite pleased with the performance . The instant diversification that one gets via these funds is definitely good for an investor starting out and keeping them away from performance chasing .

  2. WFU Says:
    February 12th, 2007 at 2:54 pm

    I considered switching to one of these funds and avoiding the

  3. WFU Says:
    February 12th, 2007 at 2:57 pm

    Sorry about that: I considered switching to one of these funds and avoiding the 10K account balance fees that T. Rowe Price and Vanguard administer. I’m young, 25, and haven’t had time to build that large of a nest egg, however I enjoy adjusting my own allocation within the 5 or so index funds I have now. I DCA every month and adjust only once/year. I do point them out to people who don’t want to take the time to do a more detailed fund search.

  4. Gaming The Credit System Says:
    February 12th, 2007 at 11:21 pm

    Well, if you’re more risk-tolerant then the obvious thing to do is buy a fund with a target date that is further out. Instead of 2040, buy 2060. If you’re less risk tolerant, get 2030 or 2020.

  5. Kristine Says:
    February 13th, 2007 at 9:41 am

    Great post! One other thing to consider when looking at target funds is how often they rebalance. Some rebalance annually, some monthly, and some rebalance daily! Most financial planners recommend rebalancing annually, so you may not want a fund that rebalances on a daily basis.

  6. Greg R Says:
    February 13th, 2007 at 9:39 pm

    For the record, Morningstar prefers T. Rowe Price and Vanguard target-date funds.
    That target-date funds aren’t perfectly tailored to each individual isn’t as important as a disciplined strategy for investing on a regular and consistent basis throughout a lifetime. Then comes adjustment for risk-tolerance, and then the choice of a particular vehicle.
    An investor can also use a “core and explore” strategy with the target-date fund (say, 75%) as the “core” and selection of other funds (25%) as the “explore” to fill out the portfolio.

  7. Sid Says:
    February 14th, 2007 at 11:32 am

    I was just curious if the cost takes into account the fact that most companies use their own funds (i.e. Vanguard will invest heavily in their own mutual funds) and do they count these fees (from the individual fund) in the total fee??

  8. Prime Time Money » Blog Archive » Target Date Funds: I Just Rebalanced My 401K For the Last Time! …maybe Says:
    January 15th, 2008 at 8:11 am

    [...] Not All Target-Date Funds Are Created Equal from All Financial Matters [...]

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