Target Date Funds

[heydude]

My employer is introducing "taget date funds," in which you choose the date you will retire and then they adjust the mix accordingly.

I already have everything mixed and planned to shuffle it in 10 years. In other words, less is in stocks and more is in bonds the older you get.

So...should I go all in to the target date fund based on my age? Set and forget?

Or, should I keep my current mixing and just go in a little to the target date fund based on where it lands on my current mix proportion desired.

Do target date funds take out more in fees or something? Or are they just the same thing that I am already doing....which is to have a mix based on my age.

[Dhiana]

The expense ratios will show you how much the target fund costs vs the funds you are already individually invested in. Run the numbers...then decide.

As far as using the age based target funds, choose to invest in whatever way provides you the least amount of stress and let's you sleep at night :)

Seriously. Set and forget isn't a bad option. Neither is manually changing the balance of your investments. Pick the option that best fits your personality so that you save as much as possible.

[sweetana3]

My husband and I prefer to keep it more in our hands but it is a probably better way for those who can do nothing other than invest and forget. But ask them what happens at retirement and beyond. We planned on living 30 years longer and "retirement" was just a date. You need long term goals to make any plan work.

These funds were set up for those who cannot seem to plan on their own and make a lot of generic decisions.

[Rogar]

I second the suggestion to check the expense ratios. I am a big fan of index funds with low management fees. I am not sure target funds can match those low fees and what seems like small differences in fees will add up.

I like the concept of target retirement funds. People, including me, may say they like having more control of the balance of things, but truth be told, I wonder how many actually have the discipline and skills to re-balance things on a routine. If you go further in your consideration, I would suggest looking at the bond/equity ratio and pick the one you are most comfortable with rather than just accepting the anticipated retirement date fund as the best. You may want to be more conservative with the amount invested in equities (or maybe more aggressive).

[Rosemary]

After some years aof saying I would balance things myself, I put some of our retirement and 529 investments into these funds. The expense ratios were fairly low, and the funds are performing adequately. I like not having the nagging feeling that I need to be re-balancing every year.

[heydude]

wow thanks. the gross expense ratio IS THE LOWEST compared to all other choices. meaning, it will cose me more to NOT DO target date funds.

is there any reason to not do them? (i am comfortable with their stock/bond ratio).

[SteveinMN]

is there any reason to not do them? (i am comfortable with their stock/bond ratio).
If the costs are lower than the other funds (unusual, but not impossible depending on your other choices) and you like the asset mix, then go for it. Beyond a simple stock/bond ratio, however, be sure you're OK with the kinds of stocks and bonds they invest in. I won't speak to whether blue chips are better than small-caps or anything like that; that's up to you. But, yeah, if it's a match for you, it's fine to put your money there.

[heydude]

spank me APPROVED steve!

[lhamo]

We have the bulk of our retirement funds invested in target funds -- I've been happy with their performance, and I like not having to rebalance.

great that this will save you money on fees!

lhamo

[dado potato]

In considering the costs of a target date fund, one should include the costs of component funds as well as the target date fund.

Vanguard states that the annual cost of their Target Date Funds is 0.18% of the asset value (which will of course vary). Vanguard is in my opinion "the one to beat" on cost. Morningstar's average cost for Target Date Funds is 1.15%.

Taking for example Vanguard's Target 2020 Fund, as of the latest semiannual report, and assuming $1000 invested:
63.7% of the fund is invested in equities, specifically:
44.5% in VTSMX, the Total Stock Market Index Fund, expense 0.18% (x$445 = $0.80)
19.2% in VGTSX, the International Stock Index Fund, expense 0.22% (x$192 = $0.42)

36.3% in VBMFX, the Total Bond Market II Index Fund, expense 0.22%(x$363 = $0.80)

If each fund did not vary in price over the year, and there was no change in the allocations, then the cost of the 3 component funds would be $2.02

Additionally, the Target Date 2020 fund expense is 0.17% (x1000 = $1.70)

Therefore, the total cost based on these assumptions would be $2.02 + $1.70 = $3.72
The annual expense ratio, based on the assumed $1000 would be 0.372%

It might be constructive to analyze all the costs in any Target Date Fund you may be considering, based on that fund's recent annual or semiannual report.

[heydude]

woah dado!

so my target date fund has a expense retio of .12percent

so, not only do i pay that, but i also pay each expense ratio of whatever the target date fund puts money in to?

with that logic, a target date fun will be adding fees no matter what!? right?

i am better off just going in to those funds by myself and my own paper trail. a few more clicks but more savings. hex, i can even just match what they are going to do for that year and save the .12 percent ?!

[balulalow]

Therefore, the total cost based on these assumptions would be $202.20 + $170.00 = $372.20
The annual expense ratio, based on the assumed $1000 would be 0.372%


I think there is a misplaced decimal here. $372.20 is 37.2 percent of 1000, not .372 percent.
0.372% of 1000 is 1000 * .00372 = $3.72.

[dado potato]

balulalow is right. I have edited my comment to correct the error.

Yes, heydude, as I understand the fees of a Target Date Fund:
the component fund fees are "deducted" from the net asset values at that level, and in addition, the fees of the target date fund are "deducted" from the net asset value of the target date fund. It should be possible to read in the prospectus of the target date fund what all the fees are.

[heydude]

what a bogus money drag. it doens't take a finanical planner to put most in stocks and less in bonds when you are young and switch to more bonds as you get old. i can pay myself that fee!

[SteveinMN]

what a bogus money drag. it doens't take a finanical planner to put most in stocks and less in bonds when you are young and switch to more bonds as you get old. i can pay myself that fee!
You can. Others feel less comfortable doing that. And there is always the price of convenience. Target-date funds are "set it and forget it". Don't even need to put a reminder on your calendar. Everything has its price. :)

[heydude]

i am getting no where. no info available. no info on fees. representatives no nothing. no additional info on the website.

she did say she does not believe they simply put money in to those other funds that my options are.

ugh.

[heydude]

i called the financial company directly and they said there are no extra fees within the target date fund. in other words, you only actually pay the amount of the expense ratio listed.

i asked if it makes sense that the targer date funds are actually lower in cost than the ones where i would do it myself, and the answer was yes, it could very well be that the "set and forget" is the cheapest.

[SteveinMN]

i asked if it makes sense that the targer date funds are actually lower in cost than the ones where i would do it myself, and the answer was yes, it could very well be that the "set and forget" is the cheapest.
it's generally known that the funds with the lowest expense ratios tend to be index funds. In this case, it appears the target-date fund is little more than an index to other funds in the company. Since those other funds appear to be actively managed and all the target fund is doing is mirroring this, I can see where the expense ratio would be lower. In addition, the ratio can be lower if more people are invested in the target-date fund rather than a bunch of other smaller funds.