I was inspired by an article in the Wall Street Journal a couple of weekends ago to look into the differences in Target Date Funds. Here we look at Vanguard, T Rowe Price, Fidelity and Charles Schwab’s target date funds.
The Wall Street Journal article (found here ) had some great information for investors looking into target date funds, which are quickly becoming America’s most popular investment.
However, there can be major differences in these funds. And those major differences can lead to a wide variety of investment results.
Costs alone could lead to a huge difference in outcomes, and these funds have a wide variety of costs, from cheap to expensive. Some other target date funds (not listed here) have expense ratios in excess of 1.25%!
I always look back at this graphic when considering the affect of expense ratios:
Consider that above when we start looking at differences of .60% in expense ratios. Your retirement portfolio will (hopefully!) be hundreds of thousands of dollars by the time you retire. Multiply some of those numbers above by 6…that is how much choosing an expense fund can hurt you!
Some common characteristics of each fund family:
(Want to skip all the text? Scroll down to the bottom for this information displayed in graphics.)
Vanguards Target Date Funds
- Simple – All of Vanguard’s funds consist of a different mix of 4 funds:
- Total Stock Market Index Fund
- Total Bond Market II Index Fund
- Total International Stock Fund
- Total International Bond Index Fund
(All bonds, in the Total Bond Market Fund, or Total International Bond Index Fund are investment grade.)
That’s it. Compare this to the funds later which may own 25+ funds. Personally, I like the simplicity.
- Cheap
Expense ratios range from 0.16% to 0.18% – making them the cheapest available. No surprise here since it is Vanguard.
- $1000 minimum investment
Which is actually a good deal, since the funds the target date funds invest in typically have minimums of $3000 or $10,000.
A list of all of Vanguard’s target date funds can be found here.
Fidelity Freedom Target Date Funds
- Complex:
Each Target Date Fund is made up of 25+ funds. Bond funds include floating rate funds, junk bond funds, and mortgage bonds. Stock funds include value funds, growth funds, small cap funds, mega cap funds, etc.
- Almost no international bond exposure:
At most, you get 0.79% in international bonds. Whether or not that is a good thing is up to you.
- Commodity Exposure:
Unlike any other fund family discussed here, T. Rowe Price is the only one that allocates a “significant” portion of commodities. Allocation percentages range from 5% to 9%.
- Highest cash allocation:
Most funds have nearly triple the cash allocation as other fund families. 2010 target date fund has a little over 12% in cash.
- Expensive:
Fidelity, T Rowe Price and Charles Schwab all have nearly equivalent average expense ratios. Consider again to the graphic above to find out just how much that can cost you. Fidelity averages an expense ratio of 0.735% on their target date funds.
- $2500 minimum.
A list of all of Fidelity’s target date funds can be found here.
T. Rowe Price Target Date Funds
- Complex
Some funds are made up of 20 or more funds. Like Fidelity, this means added costs.
- Expensive
Average expense ratio of 0.734%
- $2500 minimum, $1000 minimum in IRAs
A complete list of T. Rowe Price target date funds is here.
Charles Schwab Target Date Funds
- Complex:
Like Fidelity and T. Rowe Price, Schwab’s funds are made up of many, many funds. Typically 20+.
- Expensive:
Like Fidelity and T. Rowe Price, Charles Schwab has an average expense ratio of 0.738%. Charles Schwab has been opening up some new ETFs and Mutual Funds with very low expense ratios, but that has not yet turned to them offering reasonable expense ratios on their target date funds.
- Highest Stock Allocation:
Stock Allocations can be 90%+ in longer term funds such as 2045, or 2050. It also appears they are slightly leveraged, with a negative 5% cash allocation in the 2045 fund.
- $100 minimum. Great for those just starting out who want to start investing, but may not have thousands of dollars laying around.
A complete list of Charles Schwab’s target date funds is found here.
Graphics:
Want to see it in pictures? Here you go a few comparisons of Target Date Funds:
Conclusion
A lot of times, investors don’t really have a choice on which target date funds to be in. Their 401(k) may only provide a few options to choose from. For those, the decision comes down to either trying to replicate the target date fund’s portfolio with other funds yourself by using less expensive funds, or to suck it up and pay out.
If you are looking to invest in your IRA or Roth IRA and have options, in my opinion it’s tough to beat Vanguard’s offerings.
Which fund is for you?
You also have to consider what asset allocation you want. A portfolio with 95% (Charles Schwab) equities can have significant difference in performance compared to one with only 75% (Fidelity). If you want international bonds, you would with choose a different fund family than Fidelity, or add an international bond fund to your portfolio.
All funds are definitely not created equal. Make sure you know what is in your target date fund.
