Target date mutual funds are designed to automatically adjust their allocation depending on how long you have until the “target date.” These funds thus invest rather aggressively early on, automatically moving to a more conservative allocation over time.
While these funds are a convenient “set and forget” solution for many investors, they’re not for everyone. I’ve previously outlined four disadvantages of target date mutual funds, so I won’t rehash them here. Instead, I’ll focus on costs.
According to a recent report from the Wall Street Journal, target date funds are cutting costs by eliminating managements fees and/or moving to a less expensive combination of underlying funds.
To be fair, companies such as Vanguard were already offering low cost target date funds. But others? Not so much. The pressure to reduce costs is coming in part from large, employer-run retirement plans, but everyone stands to benefit.
For their part, Fidelity is launching a series of “Fidelity Freedom Index Funds, ” and Schwab has reduced their fees by 0.13%. The new Fidelity funds will be available in five-year increments with target dates ranging from 2000 to 2050. Presumably the 2000 and 2005 versions are for people who are already retired.
A number of others are dropping their “wrap” fees, which are really unnecessary given that most target date funds invest in funds from the same fund company. For what it’s worth, neither Vanguard nor Fidelity have been charging wrap fees on their funds.
Are you a target date fund fan?
As I noted above, I’m not crazy about them, but it’s for reasons other than cost.
Target date funds are not worth it. Their allocations schemes arbitrary enough so that 2 funds with similar objectives and investing in similar funds can have drastically different returns over the same time period. Be responsible and do your own bond/stock allocations once a year, just like you are supposed to rebalance.
I have a target retirement fund. As a “returning” student in grad school, I don’t have time (literal or mental space) to handle doing anything with this money. I had to roll over a retirement account from an old job and this was the easiest way to do it.
You can reduce fees with a Vanguard target retirement fund to ZERO by going paperless (otherwise I think it’s the in the neighborhood of $10). And their minimum was pretty low when I opened mine (I think $1000).
I’m a big fan of Vanguard’s target date retirement funds (but not other companies versions). Not just because of cost but because of the ‘index’ nature of Vanguard funds — and easy visibility into the contents of their funds.
Vanguard puts me in control, whereas with the ‘active management’ version of target date funds, you are trusting in that fund manager (no thanks).
One thing that worries me about the active management (target date funds), especially when the same fund manager(s) is managing multiple, if not all versions (2010 – 2040) is that there are probably strong desires to sacrifice one fund to prop up another. I just can’t trust any company that much.
I’ll stick with the index varieties.
We have our son’s college fund in a target date fund. Otherwise, I’m not a big fan – our retirement & other investments are mixed enough that we don’t need an automatic switchover as we age. (Plus, my partner’s so conservative we already have way more bonds in the mix than I think we need.)