Over the last decade, target date funds have increased in popularity among investors. Target date funds are especially prevalent within 401(k) plans, as they are often promoted to participants as a “set it and forget it” investment solution. According to the Investment Company Institute 2020 Fact Book, nearly $1.5 trillion is now invested in target date funds, the vast majority within 401(k) plans.
For those unfamiliar with target date funds, the fund automatically rebalances the asset mix for a predetermined time frame. Investors typically pick a target date that coincides with their anticipated date of retirement, with the fund reducing equity exposure the closer one gets to retirement. The appeal of target date funds is that they help simplify the complex. The portfolio rebalancing responsibility belongs to the fund manager, with no action required by the investor.
Most investors would probably expect target date funds with the same target date to have roughly the same asset mix, but our experience shows funds with the same target date can have significantly different asset allocations.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Let’s look at four target date funds with the same target retirement date of 2025 from four large mutual fund companies (all data below is as of 12/31/20):
| Header Cell - Column 0 | T. Rowe Price Retirement 2025 Fund | Vanguard Target Retirement 2025 Fund | Fidelity Managed Retirement 2025 Fund | Dimensional 2025 Target Date Retirement Income Fund |
|---|---|---|---|---|
| Row 0 - Cell 0 | Ticker: TRRHX | Ticker: VTTVX | Ticker: FIXRX | Ticker: DRIUX |
| Asset Allocation | 70% equity / 30% fixed | 60% equity / 40% fixed | 47% equity / 53% fixed | 35% equity / 65% fixed |
| 2020 annual return | 14.7% | 13.3% | 13.1% | 17.5% |
As you can see, the asset allocations vary significantly, even though each fund has the same stated target date.
Here are several takeaways for investors using target date funds:
- Be sure to look under the hood: Investors should explore the asset allocation of the fund. We prefer target date funds that incorporate international and emerging market equity exposure as well as U.S. equities.
- Expenses matter: Expenses are a direct reduction in return; the average target date fund’s expense ratio is 0.62%, according to ICI. Look for funds with expenses below the average.
- Don’t be too conservative: The old rule of thumb for asset allocation was subtract your age from 100 and that would be your equity allocation. But consider that for a married 65-year-old couple retiring in 2021, the probability that at least one person will live to age 95 is 50%. The rule of thumb may well be too conservative for maintaining purchasing power over a nearly 30-year retirement period.
Target date funds can be a valuable tool for investors, but remember, even funds that help simplify investing require due diligence and monitoring.
-
Seven Surprising Reasons Retirees Are Going Back to WorkSure, money is a big reason to come out of retirement, but it's not the only reason retirees are doing it.
-
Dow Gains 617 Points as Rate Cuts Near: Stock Market TodayWednesday's economic data didn't shift Wall Street's expectations that the Fed is preparing for a rate cut at next week's meeting.
-
Four Clever and Tax-Efficient Ways to Ditch Concentrated Stock Holdings, From a Financial PlannerHolding too much of one company's stock can put your financial future at risk. Here are four ways you can strategically unwind such positions without triggering a massive tax bill.
-
Beyond Banking: How Credit Unions Serve Their CommunitiesCredit unions differentiate themselves from traditional banks by operating as member-owned financial cooperatives focused on community support and service rather than shareholder profit.
-
Answers to Every Early Retiree's Questions This Year, From a Wealth AdviserFrom how to retire in a crazy market to how much to withdraw and how to spend without feeling guilty, a financial pro shares the advice he's given this year.
-
The Risks of Forced DST-to-UPREIT Conversions, From a Real Estate ExpertSome new Delaware statutory trust offerings are forcing investors into 721 UPREIT conversions at the end of the hold period, raising concerns about loss of control, limited liquidity, opaque valuations and unexpected tax liabilities.
-
I'm a Financial Adviser: You've Built Your Wealth, Now Make Sure Your Family Keeps ItThe Great Wealth Transfer is well underway, yet too many families aren't ready. Here's how to bridge the generation gap that could threaten your legacy.
-
Want to Advance on the Job? Showing Some Courtesy and Appreciation Could HelpTwo business professors share their insights about the impact of digital communication on the social skills of some in Gen Z and the importance of good manners on the job.
-
From Job Loss to Free Agent: A Financial Professional's Transition Playbook (and Pep Talk)The American workforce is in transition, and if you're among those affected, take heart. You have the skills, experience and smarts that companies need.
-
A Financial Planner's Top Five Items to Prioritize When Your Spouse Is IllDuring tough times, it's easy to overlook important financial details, but you'll be so much better off if you take care of these things right now.
