The hefty fees imposed by target date funds and their lackluster performance have not decreased their popularity, even though they have failed to outperform the S&P 500.
These funds were created to give investors an opportunity to simplify their decision-making in allocating and diversifying their assets. Viewed as a panacea by investors who have a passive approach to their retirement portfolio, an individual who plans to retire in 2035 would have a lower percentage of risky assets such as stocks and more conservative ones such as bonds compared to someone retiring much later in 2055.
Target date funds are increasingly becoming the default option in 401(k) plans, which means an even greater number of employees could become more complacent about their retirement funds, relying solely on options their companies chose which often carry expensive fees.
"Target date funds are used by participants in 401(k) accounts that either didn't know how or didn't want to bother with creating their own retirement portfolio," said Bill DeShurko, president of 401 Advisor, a registered investment advisor in Centerville, Ohio.
High Fees and Confusion
The fees investors pay for TDFs are extremely expensive with expense ratios topping 1.50%, and the funds often have expenses in the 70 to 80 basis points range, said David Twibell, president of Custom Portfolio Group in Englewood, Colo. At the core, TDFs are merely a diversified mix of other publicly available ETFs or mutual funds.
"That's a lot to pay for a target date fund," he said. "Sure, buying one catch-all fund is easier than investing in each of its individual component funds, but is the convenience really worth paying so much in additional fees?"