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All funds in this target date series
A target date fund series consist of around 10 or 12 different funds, each with their own “target date” marketed at different age demographics. We use the 2050 fund to assign ratings to target date fund series – this is the fund that would be marketed to savers looking to retire around the year 2050. As time progresses and this “target date” approaches, the portfolio mix of the fund shifts away from stocks and towards bonds and other less-risky investments. Usually, the mix of stocks in the portfolio stays the same across a target date fund series, meaning if you are invested in a fund from this target date series that is dated closer to today than 2050, you’re likely invested in the same companies flagged above, but you may have lower levels of exposure. We currently only have detailed results for the 2050 version of this target date fund series.
All tickers for this target date series
Tickers for each shareclass available from every fund in this target date series.
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Are Target Date Retirement Funds Diversified
Diversification is important to any investor. Investing in a single mutual fund seems counter to that idea, but not in the case of target date retirement funds. Target date retirement funds provide ready-made diversified portfolios that hold thousands of domestic and international stocks and tens of thousands of bonds of various credit qualities. So yes, these funds are well diversified.
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How Target Date Funds Work
Financial services firms manage families of target date funds, with individual versions for each year, past and future. Investors choose a fund that targets their anticipated year of retirement, and they may continue holding it until long after the target year has passed.
With target date funds, the term glide path describes how a funds asset allocation changes over time. All of the funds on this list utilize a through glide path, where the managers continue to adjust the balance of stock and bond funds after the designated target year. For some funds, the asset allocation changes end about five to seven years after the target date. For others, the changes continue for several decades.
For each target date fund in our evaluation, we focused on the 2060 version, suitable for someone looking to retire in about 40 years. In addition, we also evaluated the 2020 version, and some earlier versions, for insight on how the fund familys portfolio evolves as you enter retirement.
The Downside Of Target Date Funds For Retirees
Target date funds are a reasonable approach to investing for retirement. Once you reach retirement, however, these funds have a downside. They become far too conservative.
These funds follow a declining glide path. That simply means that as we get closer to retirement, the funds move stock investments over to bond investments. That in itself is reasonable. The problem is that they become far too conservative.
For example, the Vanguard Target Retirement 2015 fund is only 30% invested in stocks. A retiree six years in might want the security of a healthy bond allocation, but I would argue theres such thing as being too safe. Granted, Ive shifted my own investments into safer investments in retirement. Still, I wouldnt recommend divesting a portfolio of stocks past the 50% mark.
In fact, Bill Bengen, the father of the 4% rule, found that a retirees portfolio should have 50% to 75% in stocks. Anything less and their odds of running out of money early go up.
With the exception of M1 Finance, each of the target date funds mentioned above fall well below the 50% equity floor.
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Not All Target Date Funds Are Good Investments
Ive chosen one fund that exemplifies some suboptimal aspects that should signal investors to steer clear. I do this not to belittle the mutual fund company or fund in particular, but to illustrate what potential negative qualities of target date funds can cost investors future returns.
The fund is called the American Century One Choice 2050, ticker ARFMX. I would avoid the fund for two main reasons.
First off, the funds expense ratio is simply too high. American Century charges over 1%, making it more than 10 times as expensive as the fund options weve looked at. Unfortunately, that isnt the end of the fees associated with investing in the fund. ARFMX has a front load fee, meaning theres a sales charge paid every time you buy into the fund. Purchasing through a 401 would bypass that fee. Otherwise, and I cant caution against this enough, that fee would recur every time a contribution is made.
The second reason why Im not a fan of this fund is its asset allocation.
Remember that American Centurys target date is a 2050 fund just like the 4 funds we explored. That means the typical investor in the fund is 30 years away from retirement. Nevertheless, the fund allocations 22% in bonds. For some investors, that conservative approach might be attractive. But in my estimation, that is too cautious a strategy for investors with such long time horizons.
The American Century fund performance in comparison to Vanguards offering should bear out my concerns.
Effect Of Other Investments
Investors who have their assets in a target retirement fund need to be aware of how other retirement investments could skew their asset allocation. For example, if a target fund has an 80% stock and a 20% bond asset allocation, but the investor purchases a certificate of deposit with 10% of their retirement assets, this effectively decreases the stock allocation of the investor’s overall portfolio and increases the bond allocation.
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How Target Date Retirement Funds Work
Target date retirement funds feature a date in their name. For example, the funds weve discussed are 2050 funds. The date corresponds to the investors planned retirement date. Somebody seeking to retire in about 30 years would be especially interested in 2050 funds.
Target date retirement fund offerings are typically spaced out in 5-year increments, meaning there are 2045 and 2055 versions of the funds weve explored. Picking a retirement date is not an exact science and things do change. Still, having a target date in the fund name provides some useful information about the funds asset allocation today and in the future.
Target date retirement funds hold a combination of U.S. stocks, international stocks, and bonds. The specific weighting of those asset classes adjusts over time and can vary between mutual fund companies. The expense ratio associated with target date funds goes, in part, toward paying for these adjustments. Allocation adjustments are made based on glide paths, which are predetermined rebalancing plans that each target date retirement fund follows.
As investors get closer to their chosen retirement date, target date funds shift more heavily toward bonds and away from stocks. This shift is meant to reduce portfolio volatility during investors retirements. An attractive approach in theory but one that can create some pitfalls, which well address next.
How State Street Target Retirement Funds Work
State Street Target Retirement Funds are designed to take you through retirement.
State Street Target Retirement Funds are designed to make it easier to invest appropriately for your age because professionals make the complicated investment decisions, choosing and adjusting the mix of underlying stock and bond funds in the target retirement fund. Simply choose the fund with the date closest to when you expect to retire.
As each Portfolio glides over time, its asset mix is adjusted. Looking at the image below:
- Funds designed to adjust automatically to your investing timeframe
- Funds with longer time horizons, such as the 2050 Fund and the 2060 Fund, typically invest more in stock funds to pursue growth
- Funds with a shorter time horizon invest more in bond funds to help preserve savings and to limit ups and downs while in retirement
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Underlying Funds Offered By Same Company
Beyond expenses, another consideration is that each of the underlying funds in a target portfolio is offered by the same fund company. Every target fund in Vanguard’s lineup has nothing but other Vanguard funds inside the portfolio. The same goes for the Fidelity and T. Rowe funds. In an era with more than a few corporate scandals on record, you are trusting all of your assets to a single fund family.
Backtesting Target Date Funds
For a performance comparison of the funds, well be using Portfolio Visualizer. This site is great for backtesting portfolio options and provides a number of useful metrics for weighing funds. The data set will be limited by the age of the newest target-date retirement fund, but we have a reasonable length of time to compare the funds.
The 3 funds compete very closely with one another. The Fidelity fund ultimately wins out by only a couple hundred dollars. The standard deviation of the funds, a measure of portfolio volatility, is fairly uniform from fund to fund. The same goes for the maximum drawdown period of the funds. Safe to say, any of the three funds are reasonable and comparable options.
The M1 Finance fund has had similar return and risk characteristics.
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Target Date Retirement Funds In 401 Accounts
If target-date retirement funds are starting to seem like attractive options, it might be worth considering holding a target date fund in a 401k if one is available to you. Since company 401 plans often invest hundreds of millions at a time, mutual fund providers may offer companies an expense ratio discount to attract their business.
For example, ticker FRLPX is the Fidelity Freedom Index 2050 option offered in my 401 at Forbes. This version of the fund has the same asset allocation, holdings, and glide path but charges half the fees of the non-401 investor class fund.
I mention this industry convention not only to highlight the fee difference but also to prevent any confusion when picking funds in a 401. If theres any doubt as to whether one fund mirrors another, its best to check the Portfolio tab on the Morningstar listing for both funds and make sure the only difference is the expense ratio.
M1 Finance Target Date Retirement Funds
M1 Finance retirement funds make the top of my list for several reasons. First, for each retirement year , M1 Finance offers three different funds. All of the other options below only offer one. Specifically, M1 Finance offers investors Aggressive, Moderate and Conservative options for each retirement year.
For example, the M1 Finance 2050 Aggressive Target Date Retirement Fund allocates just 3% to bonds, while its 2050 Conservative fund allocates 19% to bonds.
Second, each of M1 Finances funds include broad stock and bond exposure across more than a dozen low cost ETFs. Here, for example, are the ETFs used in the 2050 Aggressive fund:
Third, unlike the other funds in my list, there is no elevated expense ratio to pay. M1 Finance doesnt charge a fee. The only fees are those associated with the low cost ETFs M1 uses in each portfolio, and these are lower than the fees a target date fund charges.
Finally, the fund for those now in retirement is in my view the best option available. The Aggressive 2020 fund is approximately 60/40 stock to bond allocation a reasonable approach for retirees following the 4% rule. Without exception other retirement funds become far too conservative at this stage.
M1 Finance target date funds are automatically updated and rebalanced quarterly. There is no minimum initial investment required.
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State Street Target Date Retirement Funds
State Streets 2050 target date retirement fund, ticker SSDLX, makes a strong impression with only a 9 basis point expense ratio. Its one of the least expensive options available today.
Its asset allocation is similar to Vanguards.
The Portfolio tab shows us the fund is invested 51% in U.S. stocks, 35% in international stocks, and about 10% in bonds. The holdings of the fund reveal more similarities to its Vanguard counterpart. It invests the fund in six index funds.
Three stock funds and two bond funds substitute for the inverse with Vanguards offering. The U.S. stock portion of the fund is split into an S& P 500 large blend fund and a mid-cap growth fund. Still, State Streets fund should perform in line with Vanguards, with the added benefit of the lower expense ratio we saw earlier.
- Website: State Street
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State Street Target Retirement Mutual Funds
Since 2005, State Street Global Advisors has brought a disciplined approach to the design and management of its suite of target date funds. Our institutional strategy has been road-tested across multiple market cycles to help meet the objectives of a broad range of participants.
This September, we celebrated our 5 year target date mutual fund track record, and are taking this moment to highlight our:
- Strategic index investment approach
- Fully diversified underlying fund lineup
- Graduated glidepath
Bringing our institutional investing strategies to everyone through our target date mutual funds gives advisors and their clients easy access to sophisticated solutions. Here are four key concepts to keep in mind:
1. Strategic Index Investment Approach
Our target date mutual funds are constructed using 11 underlying State Street index funds, which are designed to be cost efficient and style neutral. These funds are reviewed annually to evaluate the efficacy of the glidepath and the management of four key risks faced by participants: accumulation, inflation, longevity and volatility.
2. Fully Diversified Underlying Fund Lineup
We employ a modular approach to asset allocation to help, manage risks at the top level and within the sub-asset classes . We also provide broad exposure to equity, fixed income, and inflation hedging asset classes.
Figure 1: Following a Needs-Based Glidepath Strategy
3. Graduated Glidepath
4. “Through” Glidepath
Fidelity Freedom Index Funds
The final fund is Fidelitys Freedom Index 2050 Investor, ticker FIPFX. The exact naming of this fund is important to note. FIPFX has the word index in the fund name. Fidelity offers another Freedom 2050 target-date fund, but the underlying holdings consist of actively managed mutual funds.
As a result, that fund charges 75 basis points in fees. In contrast, the Freedom Index fund only charges 12 basis points . That expense ratio puts the Fidelity fund in between State Streets and Vanguards options.
The asset allocation of this fund is nearly identical to the Vanguard, State Street and M1 Finance Moderate funds.
Nothing surprising jumps out53% of the fund is allocated to U.S. stocks and 37% to international stocks. Bonds fill out the remaining 10%.
The holdings of the fund shouldnt shock anyone either. Fidelity uses Fidelity index funds to implement its asset allocation.
Overall, another sensibly arranged portfolioDiversified, low-cost, and convenient.
- Website: Fidelity
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Not All Funds Are Created Equal
The first challenge with target-date funds is that all funds are not created equal. A sample of approximate holdings with a target date of 2045 demonstrates this point.
|35.7% Total International Stock Index||3.0% Total International Bond Index|
While each of these funds claims to be a good choice for investors seeking to retire in 2045, the contents of the funds are different. Keep in mind that this proportion may vary even more over time. That variance can be of particular concern to retirees. One retiree may have enough money on hand to invest strictly in bonds and other fixed-income securities. Another, requiring both growth and income, may need an equity component to keep the portfolio on track. A fund that meets the needs of one of these investors is unlikely to meet the needs of the other.
Beyond holdings, the funds also differ in terms of investment style. For instance, depending on what you are looking for, you can find a fund that is is made up entirely of index funds. Based on algorithms, such a fund is likely to have lower fees . But investors who prefer active management, with actual human beings tracking market trends and making choices would need to shop elsewhere. Finding a fund with the right date is just the beginning of the decision process.