Inside, your investments are rotated, rebalanced and ready to serve for life after work. Of course, there are certainly performance and expense drawbacks to these target-date funds or TDFs: For a passively managed fund that's rebalanced every five years, retail investors are still paying a high cost of 0.84% on average in fees, and most TDF holders incurred losses of 50% or more during the Great Recession.
Still, people do love easy. TDFs are convenient and are at least becoming cheaper.
BrightScope, an investment research company, recently considered 561 target-date funds currently offered in 401(k) plans from 40 asset managers. Fund fees are down nearly 10% since 2011, falling to a current average of 0.65%.
Brooks Herman, head of data and research at BrightScope, says expenses have declined primarily for two reasons: the rising popularity of index funds and because 401(k) plan sponsors and participants are demanding lower fees.
TDFs receive the widest distribution in the 401(k) space through asset managers like Vanguard and T. Rowe Price (TROW). These firms often handle the administrative duties of the retirement plan as record keepers, too. However, more employers are choosing to separate those duties.
"What we are seeing are plan sponsors -- the people in charge of the 401(k) plan --- are actually moving away from proprietary target-date funds," Herman said. Instead of going along with a fund offered by a record keeper like Fidelity, employers are opting to select investments from 'off platform' providers. "That's a trend that we've been seeing [for] a couple of years."
Most TDFs are comprised of mutual funds, although exchange-traded funds have grown in popularity in nearly every other investment arena. In fact, two of the largest ETF providers have closed or are closing their target-date funds: BlackRock (BLK) shuttered its iShares TDFs and Deutsche Bank (DB) is liquidating its target-date offerings at the end of the month.
"No one has quite figured out how to make ETFs work in target-date funds yet," Herman said. He thinks it may be largely a technological issue related to the fact that ETFs trade throughout the day rather than just once at the market's close, like mutual funds. "Most record keepers don't actually have the technology platforms in place to allow for ETFs," he said.