Is American Funds 20xx Target Date Retirement a good fund?

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BogleMelon
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Is American Funds 20xx Target Date Retirement a good fund?

Post by BogleMelon » Thu Dec 01, 2016 9:41 am

I am trying to help a friend with her 401K, she has fidelity which is great, but so many limited options. I would personally choose among fidelity S&P 500 and another indexed fidelity bond fund and call it a day. But she is not a finance person and she is seeking simplicity (set it and forget it approach). She has American Funds 20xx Target Date Retirement funds (not fidelity target date ones), I was trying to look up these funds to see if the underlying funds are indexed or not. first thing i noticed this target date fund has enormous funds which I guess means it is active managed (I may be wrong, IDK!). Second the expense ratio is 0.73% (typical for a 401k target date fund i guess but not cheap) in addition to the underlying funds expense ratios.
Are these American TD funds are good ones? Or it is better to tell her to stay away from them?
Thanks
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dsmil
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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by dsmil » Thu Dec 01, 2016 9:56 am

It looks like the underlying funds are actively managed, not indexes. Are there other target date funds available? Your recommendations would be pretty easy for a lazy approach to work as well, and the fees are probably lower. She could just re-balance once in awhile.

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BogleMelon
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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by BogleMelon » Thu Dec 01, 2016 9:59 am

dsmil wrote:Are there other target date funds available?

Unfortunately no.
Excuse my English, it is my second language! | | "One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by bloom2708 » Thu Dec 01, 2016 10:05 am

An S&P 500 Stock Index and a low ER Bond fund/index is still pretty simple.

I would steer her back toward the 2 fund approach with an appropriate AA for her age. 70/30, 60/40, etc. Rebalance 1 time per year if needed.

Pass on the American Fund. :annoyed
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centrifuge41
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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by centrifuge41 » Thu Dec 01, 2016 10:06 am

Sorry to pile on what might be a bit tangential. Given an expensive 401k with 1.5x% Target Retirement funds from American Funds (R2), and Growth Fund of America at 1.4% (R2), what would be the better choice?

I had always thought Growth Fund of America is a closet S&P 500 fund, that costs too much (unless it's something like the R6 variant). Meanwhile, the target fund costs even more, but have generally kept up with the benchmark & Vanguard... perhaps by taking on excess risk?

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nisiprius
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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by nisiprius » Thu Dec 01, 2016 10:47 am

See below. I will translate Morningstar and say "Morningstar thinks it is a good fund."
BogleMelon wrote:I am trying to help a friend with her 401K, she has fidelity which is great, but so many limited options. I would personally choose among fidelity S&P 500 and another indexed fidelity bond fund and call it a day. But she is not a finance person and she is seeking simplicity (set it and forget it approach). She has American Funds 20xx Target Date Retirement funds (not fidelity target date ones), I was trying to look up these funds to see if the underlying funds are indexed or not. first thing i noticed this target date fund has enormous funds which I guess means it is active managed (I may be wrong, IDK!). Second the expense ratio is 0.73% (typical for a 401k target date fund i guess but not cheap) in addition to the underlying funds expense ratios.
This is just my $0.02. Given that "she is not a finance person and she is seeking simplicity" yes, I think it's a reasonable choice and you should encourage her to just go with it. She will find it easy to stick to, and she won't be tempted to look at it periodically for "rebalancing" and then start to fret about what the individual parts of the portfolio have done lately.

You didn't say exactly which year, I'll just use 2045... it's not a terrible fund. It's just one firm's judgement, but notice that Morningstar's analysts call it "silver," which is an overall judgement of many things about the fund, the company, the management. They also--too kindly in my opinion--call the fee level of 0.75 "low," but that means that it's not bad relative to funds of it's kind. Finally, although the star ratings are not persistent or predictive, they are an honest assessment of past performance that takes risk into account. In other words: Morningstar is not showing us any red flags.

Image

Oh, and without digging into it any further, let me say that this fund did, in fact, beat Vanguard Target Retirement 2045--by a small amount--over the time period shown.

Rather than going over alternatives with her, if she's tentatively picked this one herself, I'd suggest sticking with it but trying to make sure she understand what this fund is.

I would concentrate on having her understand the amount of risk involved, the amount of fluctuation she would expect to see. Since I personally am risk-averse (a fact), I tend to be uncomfortable with the stock allocations in target funds, and, at the very least, I would encourage her to round her retirement year down rather than up.

She needs to understand that she is putting her money into the stock market. Help her look through the materials she's been given, and see if you can find something like this pie chart, and the "Growth of $10,000" chart. More than 3/4 of her 401(k) savings will be going into the stock market.--about half into the U.S. stock market, about a quarter into the stock markets of foreign countries. By all means, explain that most experts think this is a sensible thing to do with long-term retirement savings, and that putting it all (say) a money market fund would not be sensible. But she should know what she's doing.

Image

If you can possibly drag her in front of a computer screen and show her this chart, live, it would be a good thing to do. Point out that in 2008-2009, this target-date, "stocks" fell about 50%, and this fund fell about 43%.

If she really can't stand the idea of a 40% loss, accept her knowledge of her own risk tolerance. The simplest thing to do in that case would be for her to contribute a portion of the contributions to a money market fund. Why? Because then at least that part of her statement will show a number that behaves like a savings account and always goes up.

She has to make the decision herself, she has to understand what she is doing beyond "because someone else told me it was a good idea." When she gets her statement, if it has a stocks/bond/cash pie chart printed on it, she should know what that means.

Source

Image
Last edited by nisiprius on Thu Dec 01, 2016 11:06 am, edited 3 times in total.
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goingup
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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by goingup » Thu Dec 01, 2016 10:49 am

BogleMelon wrote:Second the expense ratio is 0.73% (typical for a 401k target date fund i guess but not cheap) in addition to the underlying funds expense ratios.

Not correct. If the ER is .73% then that is total. (No additional cost for underlying funds.)

I'd suggest the TR fund for someone who is uninterested and has a low amount invested. American Funds are solid and well-managed, but somewhat expensive.

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BogleMelon
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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by BogleMelon » Thu Dec 01, 2016 11:09 am

goingup wrote:
BogleMelon wrote:Second the expense ratio is 0.73% (typical for a 401k target date fund i guess but not cheap) in addition to the underlying funds expense ratios.
Not correct. If the ER is .73% then that is total. (No additional cost for underlying funds.)


How could this be possible when the Target fund consists of other funds, each of these other fund has its own expense ratio and its share price adjusted daily based on that fund fee?!
Last edited by BogleMelon on Thu Dec 01, 2016 11:13 am, edited 1 time in total.
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BogleMelon
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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by BogleMelon » Thu Dec 01, 2016 11:12 am

BogleMelon wrote:
goingup wrote:
BogleMelon wrote:Second the expense ratio is 0.73% (typical for a 401k target date fund i guess but not cheap) in addition to the underlying funds expense ratios.
Not correct. If the ER is .73% then that is total. (No additional cost for underlying funds.)


Check this please:

"Each mutual fund within the target-date fund comes with an underlying fund expense. Then, many fund companies add an extra fee layer to the target-date fund itself, as a cost of choosing which funds to select within the portfolio.
I spoke with Georgia-based, fee-only certified financial planner Chris Hardy about target-date fees. Using the Fidelity Freedom 2055 Fund as an example, Hardy explained that the fund is basically a grouping of Fidelity mutual funds … with another layer of fees added on top.
“The Freedom 2055 Fund has an expense ratio of .75 percent and then the underlying funds have another layer of fees that range from .1 to .97 percent,” he said. “And remember that this is in addition to the overall fund fee!” Instead, suggests Hardy, many investors can receive one-on-one investment advice from a certified financial planner for less than the almost 2 percent cost of Fidelity’s target-date fund."

Source:
https://www.moneyunder30.com/index-fund ... date-funds
Excuse my English, it is my second language! | | "One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

goingup
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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by goingup » Thu Dec 01, 2016 11:40 am

BogleMelon wrote:
goingup wrote:
BogleMelon wrote:Second the expense ratio is 0.73% (typical for a 401k target date fund i guess but not cheap) in addition to the underlying funds expense ratios.
Not correct. If the ER is .73% then that is total. (No additional cost for underlying funds.)


How could this be possible when the Target fund consists of other funds, each of these other fund has its own expense ratio and its share price adjusted daily based on that fund fee?!

It doesn't work that way. The net ER of the Target Fund is the cost charged to the investor. It would be nearly impossible to figure out the cost of Target Funds if investors had to add up all the moving parts. Here is the info from Fidelity about the Freedom 2055 Fund.https://fundresearch.fidelity.com/mutua ... /315793851

One thing to keep in mind when you hear a random Financial Advisor on the internet rail against a Target Fund is the fact he may have an agenda to tell...untruths. What's that quote the Taylor loves from Upton Sinclair (paraphrase)--It's hard to get a man to understand something when his livelihood depends on him not understanding.

When evaluating the cost of a fund look for Net ER.

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Re: Is American Funds 20xx Target Date Retirement a good fund?

Post by 1030danielle » Thu Dec 08, 2016 12:08 am

FWIW, Vanguard Target Date funds have low expense ratios (under 0.20%) that are weighted averages of the handful of funds that comprise the Target Date fund. There seem to be no other hidden fees for Vanguard's picks... unless I am reading the prospectus wrong.
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