Target date funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Fisherman
Posts: 130
Joined: Sun Jul 20, 2008 10:04 am

Target date funds

Post by Fisherman » Thu Jun 05, 2014 7:28 am

Dear all,

Need some guidance on the best target date funds available. Our 401k plan is considering changing the investment choices in our plan and requested fund suggestions from plan participants as well.

Currently they have Fidelity freedom funds with expense ration of around 0.70. They can include any fund company, no restrictions, if the committee approves.

Trying to educate myself between TIAA-CREF life cycle, Vanguard target date and Fidelity freedom Index target date( expense ratio<.20). I know the investment choices in these, any difference in overall glidepaths ?, is one better than the other?

If one has to request DFA funds, which DFA funds are needed to make a diversified portfolio. I am going to request 3 vanguard indexes TSM, exUS index, already have TBM

Any other investment class to include like REITS, TIPS etc.

thanks

Longtimelurker
Posts: 471
Joined: Fri Dec 13, 2013 8:23 am

Re: Target date funds

Post by Longtimelurker » Thu Jun 05, 2014 7:41 am

I know someone will post the different allocations over time of each choice, so I won't go there. What I will tell you is that expenses are critically important. The 0.5% difference per year is huge. Think of this. All other things being equal, a person starting with $0 balance and contributing $1k per month for 30 years would have

Fidelity after expenses 8%: $1,468,150
Vanguard after expenses 8.5%: $1,617,275

Advantage of lower expenses: $149,125
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.

User avatar
BigOil
Posts: 220
Joined: Wed May 23, 2012 2:45 pm

Re: Target date funds

Post by BigOil » Thu Jun 05, 2014 9:41 am

The previous posters is correct expenses are critical. In fact expense is the single best predictor of future performance.

"Target Date" funds, which are now much more preferred in plans due to changes regulations apparently, are like most everything sold in investing --- being perverted to make money for the shareholders of the investment company itself.

In the case of Fidelity (which are in my wife's plan) Target date retirement funds--- I would not call them stinkers --- but they make no academic sense, and are five times the cost Vanguard's. They have a "dog's breakfast" of actively manage funds. The purpose of having such allocations could only be to raise the estate value of the Johnson family that owns Fidelity. Not provide a academically sound investment products.

Understand most investments products only have to be "suitable", not fiduciary aligned with a customer. That's a pathetically sad legal protection when a product is marketed as a target date "all in one concept". In essence trusting your future with the company entirely in one product, and the rules do not require full disclosure of what is indisputably best practices based on peer-reviewed academics.

Good investment products start with science. It's that simple. In most cases this means indexing, or approaches very close to indexing. Vanguard is a leader in this area. They have excellent white paper on why their target funds provide an extremely academically justified composition and stock-bond allocation. I suggest you read that white paper. It's a little bit heavy. Vanguard doesn't really effectively market as they a mutual fund company with mutual owners. Their marketing really stinks sometimes even when their products are among the best. Of course the marketing should be relatively inexpensive, as those of us that own funds own Vanguard too!

Probably the biggest single criticism I can level at the Vanguard target funds---they are heavily biased towards equities throughout the accumulation phase --- roughly 90% equities but are very very diversified.

I think many investors could not handle the downturn in a 90% stock portfolio when the market inevitably crashes. I think Vanguards made the correct allocation choice but some investors will confuse the correct choice, with the with the best results at a given point in time --- those are not necessarily congruent concepts. Basically confusing decision processes with results, and the difficulty comparing apples and oranges. It is easy to adjust by selecting a different target date. But that will be too complex for some employees.

Finally, I would note that the Vanguard Target date funds in my plan have even even lower expenses than the retail products. Maybe your plan can achieve the same discount.

If I was asking for proposals to change a 401(k) plan, I would request that companies submit academic-based evidence of how they choose their target date fund allocations. I would not weight past performance in the decision. The evaluation matrix I might suggest, would most heavily weighted expenses, followed by weights for academic composition, and academic-based diversification. Perhaps some smaller weights for the more subjective areas of customer service ease-of-use advice etc.

User avatar
JamesSFO
Posts: 3039
Joined: Thu Apr 26, 2012 10:16 pm

Re: Target date funds

Post by JamesSFO » Thu Jun 05, 2014 9:59 am

Expense Ratio is probably the best indicator.

See NYTimes emphasizing the "Costs Matter Hypothesis" recently - http://www.nytimes.com/2014/06/01/your- ... l?emc=eta1
Title: Rules of the Fund Road: Watch the Fees, and Don’t Look Back

...How much a fund charges in expenses does work. Within certain limits, fee levels provide an excellent guide to the future. Of course, fund fees in themselves don’t guarantee that you’ll do well with a particular investment; a bad bet doesn’t magically turn into a good one if the fees are low. But all things equal, you will be a lot better off if hefty fees aren’t eating up your returns...
Costs matter.

rkhusky
Posts: 5158
Joined: Thu Aug 18, 2011 8:09 pm

Re: Target date funds

Post by rkhusky » Thu Jun 05, 2014 11:06 am

BigOil wrote: If I was asking for proposals to change a 401(k) plan, I would request that companies submit academic-based evidence of how they choose their target date fund allocations. I would not weight past performance in the decision. The evaluation matrix I might suggest, would most heavily weighted expenses, followed by weights for academic composition, and academic-based diversification. Perhaps some smaller weights for the more subjective areas of customer service ease-of-use advice etc.
I'm not sure how you can evaluate the allocations without considering past performance. Even the stock/bond split decision is based on historical past performance.

Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 8:41 pm
Location: Nowhere

Re: Target date funds

Post by Leeraar » Thu Jun 05, 2014 6:41 pm

Fisherman,

I would suggest the Vanguard LifeStrategy Funds.

Target Date Funds from different providers are similar in name only. If you look under the hood, you will see their holdings can be very different.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

User avatar
joe8d
Posts: 4275
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: Target date funds

Post by joe8d » Thu Jun 05, 2014 7:00 pm

Leeraar wrote:Fisherman,

I would suggest the Vanguard LifeStrategy Funds

L.
That would be my choice also.
All the Best, | Joe

Fisherman
Posts: 130
Joined: Sun Jul 20, 2008 10:04 am

Re: Target date funds

Post by Fisherman » Thu Jun 05, 2014 8:51 pm

Thanks for the input.

We are going to request target date index funds. Is there any difference between TIAA-CREF target date index/Vanguard TDF Index/Fidelity target date index, all the three have low expense ratios

Just I want to educate myself if they suggest other TDF indexes instead of Vanguard

Also they want to satisfy other non-indexers as well participating in the plan, if you have any actively managed funds you really like in your retirement plans, please inform me

thanks

Fisherman

User avatar
joe8d
Posts: 4275
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: Target date funds

Post by joe8d » Thu Jun 05, 2014 9:02 pm

You would certainly want the lowest expensed,index offering which would be Vanguard.
All the Best, | Joe

User avatar
Duckie
Posts: 5624
Joined: Thu Mar 08, 2007 2:55 pm

Re: Target date funds

Post by Duckie » Thu Jun 05, 2014 11:27 pm

Fisherman wrote:We are going to request target date index funds. Is there any difference between TIAA-CREF target date index/Vanguard TDF Index/Fidelity target date index, all the three have low expense ratios
Fidelity has only one target-date "index" fund. The Freedom funds are not "index" funds and are not cheap. They're not very good either; they're full of garbage funds. TIAA-CREF has Lifecycle funds that are decent but not cheap (click on "Show All Funds"). Vanguard's Target Retirement funds are both good and cheap. Their only problem is they won't provide a kickback to the plan advisor.

Tiger85
Posts: 3
Joined: Sun Jul 07, 2013 6:35 pm

Re: Target date funds

Post by Tiger85 » Thu Jun 05, 2014 11:52 pm

I agree with all the points made by Duckie, but just note that the Fidelity Four-in-One Index fund is not actually a target date fund as it does not have a "glide path" or plan to adjust it's percentage of holdings over time. It's a good fund, but the asset allocation doesn't adjust like target date funds.

Fisherman
Posts: 130
Joined: Sun Jul 20, 2008 10:04 am

Re: Target date funds

Post by Fisherman » Fri Jun 06, 2014 6:05 am

TIAA-CREFF and Fidelity does offer Target date index funds for institutional investors at low expense. Please review the money magazine review on best mutual funds
http://money.usnews.com/funds/mutual-funds/target-date

Overall by reviewing Vanguard and TIAA, both are good but Vanguard appears a bit more conservative and includes Short term TIPS and international bonds where as TIAA adds around 20% more emerging market index to international allocation. Risk wise Vanguard is neither too aggressive or too conservative. Like them

So far our company is very good listening to us. we are trying to get more low cost funds into the plan

thanks

User avatar
Taylor Larimore
Advisory Board
Posts: 26901
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Target date funds

Post by Taylor Larimore » Fri Jun 06, 2014 6:45 am

Need some guidance on the best target date funds available.
Morningstar ranks Target Date Funds into several broad categories. The last ranking I saw placed only T. Rowe Price and Vanguard in their top category.
I am going to request 3 vanguard indexes TSM, exUS index, already have TBM
Excellent!
Any other investment class to include like REITS, TIPS etc.
Avoid the temptation to add additional funds.

The government TSP Plan is considered the best (and largest) 401K (type) plan. It is simple and low-cost. Use it as a guide.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Fisherman
Posts: 130
Joined: Sun Jul 20, 2008 10:04 am

Re: Target date funds

Post by Fisherman » Sat Jun 07, 2014 6:51 am

Thank you Taylor. I really liked the TSP plan. It is less aggressive than other TDF, very low expense and looks like TSP uses treasuries more for bond allocation. As you suggested using TSP as a guide.

Agree with you on Vanguard Target date indexes.

The problem with many of the 401K plans are, not only not having adequate low cost index fund choices but also higher plan maintenance fee which is charged to plan participants, not paid by the employer.

I am really shocked to see the choices in some other company plans and their expenses.

I suggest who ever has company 401K plan, analyze them not only for fund choices but also the plan maintenance charges (some times they are hidden in the fund expenses). It is my experience that the employer will be receptive to our suggestions as it also benefits the company executives. But one has to be persistent. It took me almost a year to make my employer to revisit the plan. I believe that this is a civic duty and indirectly helps all the plan participants to retain 20% more of their retirement savings .

Thank you all

gerrym51
Posts: 1679
Joined: Sat Apr 27, 2013 1:44 pm

Re: Target date funds

Post by gerrym51 » Sat Jun 07, 2014 8:46 am

original trprice target date funds-they have 2 kinds

Longtimelurker
Posts: 471
Joined: Fri Dec 13, 2013 8:23 am

Re: Target date funds

Post by Longtimelurker » Sat Jun 07, 2014 9:16 am

Fisherman - the difference between Fidelity and Vanguard is in the different motivations. Fidelity exists to enrich the Johnson family (owners of Fidelity), they make every effort to hide their low cost options and to push clients into their more costly and profitable funds, including Target Retirement funds with expenses @ 0.63% or more. I know this because my company, a mid-cap tech company @ $10b market cap, has their plan with Fidelity and it is very clear from the options that the salespeople at Fidelity are trying to make my plan profitable for themselves. The only index options I have (thank god there are some) are Northern Trust Index funds.

On the other hand you have Vanguard, who is owned by the shareholders of their funds & ETF's. They actively work to push their clients into lower cost options, that are in the best interest of the clients, not some oligarch family in Massachusetts.

Over the next 30 years, who would you want as your partner?
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.

Fisherman
Posts: 130
Joined: Sun Jul 20, 2008 10:04 am

Re: Target date funds

Post by Fisherman » Sat Jun 07, 2014 6:32 pm

Longtimelurker

Agree with you and Vanguard is a better choice.

BigJohn
Posts: 1523
Joined: Wed Apr 02, 2014 11:27 pm

Re: Target date funds

Post by BigJohn » Sat Jun 07, 2014 6:53 pm

Just got this info to use in post on another thread.

Just for grins I took a look at how Fidelity & VG construct target retirement 2045 funds. Fidelity uses 22 total funds only two of which are indexes, has an ER of 0.78% and for bonds do not use a US bond index. VG uses four funds, all indexes and has an ER of 0.18%. AA right now for both about 90/10 with 5 yr annual performance for Fidelity is ~14% with VG at ~18.5% Just trying to reinforce that you need to be mindful that Fidelity advice is not immune to a profit motive.

Seems pertinent here as well as supports VG as the far better choice.

harikaried
Posts: 1196
Joined: Fri Mar 09, 2012 3:47 pm

Re: Target date funds

Post by harikaried » Sat Jun 07, 2014 7:09 pm

Duckie wrote:
Fisherman wrote:We are going to request target date index funds. Is there any difference between TIAA-CREF target date index/Vanguard TDF Index/Fidelity target date index, all the three have low expense ratios
Fidelity has only one target-date "index" fund. The Freedom funds are not "index" funds and are not cheap.
Fidelity does have "Fidelity Freedom" Index <date> Funds that are "Class W".

For example:
https://nb.fidelity.com/public/workplac ... rices/2338
Fidelity Freedom® Index 2055 Fund - Class W
FDEWX
0.16% net expense ratio
61.37% Spartan Total Market Index Fund - Class F
27.22% Fidelity Series Global Ex U.S. Index Fund
9.94% Spartan U.S. Bond Index Fund - Class F
1.46% Fidelity Series Commodity Strategy Fund - Class F

Here's a brochure I found that includes the glide path:
http://www.union.edu/offices/human-reso ... ochure.pdf

Fisherman
Posts: 130
Joined: Sun Jul 20, 2008 10:04 am

Re: Target date funds

Post by Fisherman » Sat Jun 07, 2014 8:08 pm

Thanks Harikaried for the link

Bitzer
Posts: 133
Joined: Mon Apr 04, 2011 10:25 am

Re: Target date funds

Post by Bitzer » Sun Jun 08, 2014 8:28 am

I don't believe class W Fidelity Target Date funds are available to retail investors (such as me). For instance the only class of Fidelity Target Date 2030 fund that is available to me is FFFEX and its performance is average, at best.

Post Reply