By Jon Ogg for InvestorPlace.com.
There was an interesting launch last week from
in its new "target date" funds, which aim to entice investors to put their money into a single fund for a target retirement date. Vanguard's new target fund is for 45 years down the road via the
Vanguard Target Retirement 2055 Fund
This is the 12th such target date fund from the company that seeks to keep larger exposure to equities at younger ages, gradually rolling to fixed income as the retirement age gets closer. The fund is aimed at investors 18 to 22 years old who plan to retire and leave the work force in or within a few years of 2055. Allocations will start at 90% equities and 10% bonds. That will eventually get to 50% and 50% between the two classes and ultimately to 30% equities and 70% bonds.
Where this class, and ultimately this fund, comes into play is via low expense ratios; this one is expected to be 0.19%. Vanguard pulled some data from
and said the expense ratio compares with a peer-average target fund expense ratio of 1.17%. In an era of low returns on investments from stocks and on and off in bonds, a level of nearly 1% will make a huge difference on an apples-to-apples basis through time.
Many investors argue that their brokerage commissions or money management fees eat up all of their returns through time because of the bad years thrown into the mix. Pretend your only ambition is to break even -- a bad goal, but it is better than many have done in recent years. Pretend you start with $100,000. At 0.19% on a static $100,000, you get $190 per year or $8,550 over 45 years. At 1.17% on a static $100,000, you get $1,170 per year, or $52,650 over the same period.
The 2055 Fund will invest in other low-fee index funds within the Vanguard family. It does include U.S. stocks and bonds, but also gives exposure to emerging market and developed-markets stocks. Here is the initial allocation by individual funds:
- Vanguard Total Stock Market Index Fund, 71.8%
- Vanguard Total Bond Market II Index Fund, 10.1%
- Vanguard European Stock Index Fund, 8.6%
- Vanguard Pacific Stock Index Fund, 4.8%
- Vanguard Emerging Markets Stock Index Fund, 4.7%
The target date funds have grown rapidly since their inception in 2003, with total aggregate assets of nearly $67 billion as of July 31. Vanguard also notes that one-third of all Vanguard defined-contribution participants have all or part of their retirement plan account invested in a target-date fund.
This is not the first of its kind nor is Vanguard the only fund management group to have target-date funds.
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