Nov 8 Not all target date funds are created
While these prepackaged, risk-reducing portfolios make a
lot of sense for retirement saving, you don't know if the funds
within them are good choices unless you open them up and peel
The lowest-cost among them contain index funds that track
baskets of securities. While neither a perfect nor risk-free
solution, these funds offer an efficient way to invest in the
entire stock or bond market without engaging costly active
The products are designed to ratchet down stock exposure --
and then hold more bonds -- the closer you get to a planned
retirement age or "target date."
Generally, all-index funds are the best place to start when
considering target date portfolios because of their lower cost
and better diversification. There are only seven fund groups
that offer an all-index line-up within their target date
offerings, according to Brightscope.com President Ryan Alfred,
whose firm tracks and rates 401(k) plans. Here they are:
* Fidelity Freedom Index group, which has funds like the
Fidelity Freedom Index 2010 W Fund
* ING Index Solution Portfolios, with funds like the ING
Index Solution 2015 Portfolio ADV
* iShares S&P Target Date, with funds like iShares S&P
Target Date Retirement Income Index
* JHFunds2 Retirement Portfolio, with funds like JHFunds2
Retirement 2015 Portfolio 1
* Nationwide Destination, with funds like the Nationwide
Destination 2015 Fund
* TIAA-CREF Lifecycle Index, with funds like the TIAA-CREF
Lifecycle Index 2010
* Vanguard Target Retirement, with funds like the Vanguard
Target Retirement Income Fund
If cost was all there was to be concerned about, this list
could serve as a benchmark for all target date products and we
could stop here.
Yet the whole is greater than the parts when evaluating
lifestyle funds. To further sort them out, you need to
calculate the costs, see how they perform against peers and
market averages and assess their "glidepath," which is the
gradual reduction of stocks and an increase to income
investments as you get closer to your target date. And after
you do all that, only one all-index portfolio gets an overall
grade of "A" from Brightscope. The winner: Vanguard.
Of the others, they fell short in some of the rated
categories, especially lowest costs, risks and most prudent
strategies. The JHFunds2 group, for example, only rated a "C"
("A" being the highest) in Brightscope's company evaluation.
TIAA-CREF got "Cs" in both strategy and company ratings.
Fidelity got "Ds" in those categories.
What do these letter grades mean? According to the
Brightscope methodology, it has to do with how the fund
managers reduce risk over time. The iShares group, for example,
received a "C" from Brightscope because "the funds extend their
glidepath an unspecified number of years beyond the target date
with 45 percent stock exposure and eventually come down to 33
Do you want to have nearly half of your money in stocks
when you hit retirement age? If not, then choose a glidepath
that reduces your stock allocation to less than 40 percent by
your target date and beyond. Keep in mind that since these
products are on autopilot -- they reallocate every year
according to built-in formula -- you can't change how they
Also be aware that you're being charged for the service of
yearly automatic allocation. The iShares products, for example,
are ultra-low cost exchange traded funds (ETFs) that could be
individually bought for about 0.18 percent annually. But an
"overlay fee" common to target date funds boosts the annual
fees to 0.29 percent annually, Brightscope reports (see).
Still, that's a relative bargain compared to the average
fund expense ratio of 0.75 percent, the company found in
surveying 400 individual target date funds. You could do very
well expense-wise if you stick with an all-ETF portfolio since
the average for stock funds is 0.76 percent and 0.50 percent
Keep in mind that individual fund expenses can vary widely
-- from an outrageous 2.3 percent to a rock-bottom 0.16 percent
-- according to Lipper, a Thomson Reuters company. To save
money, you can assemble your own target date portfolio using
What if you discover that the target date fund you've
already chosen for your 401(k) is overpriced? Lobby your
employer to get a lower-cost vendor. There's nothing worse than
being locked into an overpriced product that just eats away at
Since there are plenty of alternatives, if you're not
getting institutional pricing at the lowest-possible rates, ask
why and demand action.
When it comes down to evaluating all of these criteria,
that group of seven gets whittled down to three. So to save
money, you can assemble your own target date portfolio and
allocations, or just stick with the top-rated Vanguard, or
runners up TIAA-CREF or ING offerings.
--The author is a Reuters columnist and author of The
Cul-de-Sac Syndrome. The opinions expressed are his own.