Target-date mutual funds are commonly found among company-sponsored retirement plans such as 401ks and 403bs. But there’s a wide chasm separating the wheat from the chaff.
These “set-it-and-forget-it” funds own a broad mix of stocks and bonds that slowly changes over time. The farther out your retirement date, the greater percentage of assets will be skewed towards stocks as a riskier growth asset. The portfolio will then begin to balance itself toward bonds and cash to become more conservative the closer you get to retirement.
The beauty of this setup is that it creates a one-stop shop for investors who don’t know much about asset allocation or portfolio strategy. The fund does all the work of proper diversification, rebalancing and targeting to a suitable risk tolerance so you can continue to work, save and invest.
If you have most of your money in a 401k, then there is likely just one fund company with a narrow menu of target-date funds. It won’t be hard to figure out which one to choose. However, if you are looking to purchase one of these options from a more flexible brokerage platform in an IRA or taxable account, you have far more options at your disposal.
Not all target-date mutual funds are created alike. They often differ in their asset allocation, fees, and overall performance. Some investors may choose a fund simply based on the company that manages it. However, it’s worth evaluating some of the top options to ensure you are making the proper decision to suit your needs.
For this analysis, I looked at the target date funds in the 2030 category at Vanguard, Fidelity Investments, T. Rowe Price Group Inc (NYSE:TROW) and American Funds. This segment generally represents investors who are looking to retire in the next 13 to 17 years. It also is where a significant bulk of assets are represented among these four competitors.
The competition includes:
- Vanguard Target Retirement 2030 Fund Investor Shares (MUTF:VTHRX)
- Fidelity Freedom 2030 Fund (MUTF:FFFEX)
- Rowe Price Retirement 2030 Fund (MUTF:TRRCX)
- American Funds 2030 Target Date Retirement Fund Class A (MUTF:AAETX)
The following table represents the most recent statistics of these target-date funds as of Dec. 31, 2016.
The most obvious observations on this table should come as no surprise to anyone. Namely, Vanguard is the lowest-cost option with an all-in expense ratio of just 0.15% annually. The remainder of the group is clustered in the 70-75 bps range, which is about average for actively managed mutual funds.
Furthermore, it should be noted that the American Funds share class is an “A share,” which includes a front-end sales load. That may be waived in some cases, but may be an immediately disqualifying factor for many investors. Returns for AAETX are reported on the net asset value of the fund performance without including the sales load.
One of the more surprising recognitions for this group is how heavily invested in stocks these portfolios are.