The Best Target Date Funds, Part 2
Thanks for coming back for Part 2 of this important subject. In Part 1, I discussed the advantages of target date funds, introduced the criteria for my analyses of the best target date funds, and summarized the net investment performance over the last three years. Here I'll cover expenses and then summarize my conclusions on the best target date funds -- as well as funds to avoid.
Expenses
Many studies show that an important factor that impacts the net rates of return over long time periods is the expenses that are charged by the mutual fund company. Most target date funds that are a "fund of funds" add a layer of charges on top of the underlying component funds. Notable exceptions to this practice are the target date funds offered by Fidelity Investments, T. Rowe Price, and Vanguard, which only charge expenses from the underlying component funds.
That being said, what's most important are the total expenses charged to the fund, including both the target date fund expenses and the expenses of the underlying funds.
The lowest total annual expense charges were turned in by these funds:
- Vanguard Target Retirement (VTWNX): 0.18%
- American Funds Target Date R5 (RECTX): 0.54%
- Fidelity Freedom (FFFDX): 0.72%
- Russell LifePoints Strategy S, R1 (RLLRX, RLLSX): 0.72%
- AllianceBernstein Strategic Adv (LTHVX): 0.72%
- T. Rowe Price Retirement (TRRBX): 0.73%
- MFS Lifetime B, C, R1 (MFLBX, MFLCX, MFLEX): 1.99%
- DWS LifeCompass B, C (SUPBX, SUPCX): 1.96%
- Principal Financial Lifetime B (PLIBX): 1.89%
- Wells Fargo DJ Target B (STPBX): 1.86%
- AllianceBernstein Ret Strategy B, C (LTHBX, LTHCX): 1.72%
I prefer funds with annual expense charges less than one percent, and the lower the better. And stay away from funds with front-end or back-end loads and 12b-1 fees. Ask about these fees before you invest!
The Best Funds
When using my criteria and considering both the investment performance and level of fund expenses, the 2020 target date fund from Vanguard (VTWNX) stands out from the pack. The reasons are its good performance over the last three years, the low level of expenses, and the simple offering -- there aren't several versions of this fund.
In the Best Funds category, I'd also include the funds from Wells Fargo (WFDTX) and Russell (RLLRX), with a caveat. Each of these companies' funds have different versions, some with and without a front-end load, and some with higher expense loads. Make sure you're buying the version without the front-end load and with the lowest expense charges. If you aren't able to buy such a fund from Wells Fargo and Russell, then go to Vanguard which only offers one version of its target date fund.
Notably missing from this group is the target date fund from T. Rowe Price (TRRBX), which normally places well in target date fund comparisons, and the reason is instructive. T. Rowe Price's target date funds have higher allocations to stocks compared to most target date funds, as noted in my prior posts. The latest downturn hurt them when measuring performance over the last three years. In fact, T. Rowe Price's fund was in the top five performing funds before the latest downturn. If you prefer aggressive asset allocations, I'd include their target date funds as well.
Funds to Avoid
In my opinion, it doesn't make sense to buy a fund that has a front-end load or high expenses. The goal of target date funds is to be a simple, "one choice" fund with low ongoing maintenance and costs. I believe that most people can do the necessary homework on their own to select a target date fund, so why pay the upfront load? If you really want help choosing a target date fund, then find a qualified financial planner who charges by the hour. Most likely, you'll pay the planner a lot less money than the upfront load.
With that in mind, I'd say that the funds to avoid are the load versions of the lowest-performing funds that have the highest annual expense charges, which would be the following funds. The percentages following each fund are the reported annual expense charges and the front-end load, respectively.
- AllianceBernstein Strategy B (LTHBX): 1.72% 4.0%
- DWS LifeCompass B (SUPBX): 1.96% 4.0%
- Principal Financial Lifetime B (PLIBX): 1.89% 5.0%
In my earlier posts, I encouraged readers to "look under the hood" of the target date funds they were considering, since the current asset allocation and glide paths can differ significantly among the various financial institutions. The considerations described above provide even more reasons to look under the hood. But it's time well spent, given the importance -- the amount of money you'll have for retirement.
More on MoneyWatch
The Best Target Date Funds, Part 1
How to Pick a Target Date Fund
How to Pick a Target Date Fund, Part 2
Don't Pay Too Much for Financial Advice
