Are Target Date Funds Worthy of Your Portfolio?
May 21, 2013
If you have looked at your 401(k) investment options recently, chances are you have noticed a list of funds that all have similar names with the exception of a year at the end of each. These â€œTarget Dateâ€ funds were built as an all encompassing investment to help you plan for your retirement all in one product. These funds were allocated in a way where you would receive full diversification of both equities and fixed income, with maybe a hint of other diversifiers thrown in the mix. As you get closer to that â€œtarget date,â€ the fund gets more conservative. This sounds great in theory, but are you really getting the best option for your nest egg with this?
All in the Family
The way these mutual funds are built is by using the mutual funds in the fund family arsenal. For example, in a Fidelity Freedom Fund, you will find holdings such as Fidelity Series High Income or Fidelity Advisor Large Cap. Franklin Templeton investors will find items like Franklin Rising Dividends and Templeton Global Bond. You get the bad with the good with these â€œbasketâ€ funds. For every four and five-star fund you have access to, there is a dog that is limping along, dragging down your return.
Apples to Apples?
These funds can be very difficult to compare to each other. Investors in the 35-40 year range who are looking at a retirement age of 70, would look at a target date fund with a 2045. We looked at four different versions of these funds and have found glaring differences. First, in terms of allocation, there was a difference in equities in as much as 10%. The most aggressive was the American Funds version with 84%, of which 30% was international. Franklin Templeton and JP Morgan both came in at 78% with the first one having 28% international exposure and the second 31%. The least aggressive of the four was Fidelity at 74%. Of that, 31% was international.
Looking at the fixed income side of the fund also showed a wide range of differences. While Fidelity had the least amount of equity, it pushed the envelope on the debt side with almost 70% having a credit rating of BBB or lower. Compare that to American Funds with just over 10%.
The expenses of the funds varied as well. Using the A-shares, there was a difference in the Gross Expense Ratio of almost a full percent in these funds. These differences make it very difficult to compare them to each other.
Ultimately, the big question is do these funds deliver? Take a look at the stats below (as of 4/30/2013):
It may very well be that these target date funds are the only options in your retirement accounts. However, if they are not, you may be best served to look elsewhere for your investing needs. At the very least, look under the hood of these mutual funds and see how they are really doing. There are plenty of free resources out there for you to learn about these funds before you invest in them.
What are your thoughts on target date funds? Leave a comment!
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