Target Retirement Funds are a popular investment option in many workplace retirement plans such as 401k, 403b, 457, and TSP. They offer a relatively simple and straightforward way to invest your retirement savings as their investment approach is based on the individual target retirement dates.
Nowadays, almost all employers and 401k providers offer target retirement funds – from Fidelity to Vanguard, American Funds, Blackrock, and Schwab. Although employers and advisors have a choice amongst several fund families, they will typically select one of them for their plan. Multiple target fund families are readily available in individual brokerage accounts or self-directed IRAs.
Workplace plan participants typically have to choose one fund from a single family with target retirement dates in 5-year increments – 2025, 2030, 2035, 2040, 2045, and 2050. Often, plans with auto-enrollment features will automatically assign a target retirement fund based on the estimated year of retirement. Manual enrollment programs will have the fund series in their fund line-up, which could consist of a mix of index, actively managed and target retirement funds.
The base assumption of the target retirement funds is that younger investors have a long investment horizon and higher risk tolerance, therefore, they should have their target retirement assets in more risky investments such as stocks. Inversely, older investors will have a shorter investment horizon and lower risk tolerance. Therefore, the majority of their target retirement money will be in more low-risk investments such as bonds.
Despite their growing popularity, target retirement funds have some limitations and are not identical. They have substantial differences that may not always appeal to everybody. In this post, I would like to explain some of those nuances.
Style
Target funds utilize two main investment styles – passive indexing and active management. Passive Target Retirement Funds like Vanguard and BlackRock LifePath primarily invest in a mix of index funds. The second groups including T. Rowe Price, Fidelity, American Century, and American Funds pursue an active strategy where investments are allocated in a mix of active mutual funds typically managed by the same firm.
Fees
The fund investment style will often impact the management fees charged by each fund. Passive funds tend to charge lower fees, usually around 0.15% – 0.20%. On the other hand, active funds typically range between 0.40% – 1%.
| Name | Ticker | Morningstar Rating | Morningstar Analyst Rating | AUM | Expense |
| Vanguard Target Retirement 2045 | VTIVX | 4-star | Gold | $18.1 bil | 0.16% |
| T. Rowe Price Retirement 2045 | TRRKX | 5-Star | Silver | $10.2 bil | 0.76% |
| American Funds 2045 Trgt Date Retire R6 | RFHTX | 5-Star | Silver | $4.8 bil | 0.43% |
| Fidelity Freedom® 2045 | FFFGX | 3-Star | Silver | $3.5 bil | 0.77% |
| American Century One Choice 2045 | AROIX | 4-star | Bronze | $1.7 bil | 0.97% |
If you have any doubts about how much you pay for your fund, double-check with your plan administrator or Human Resource. Not to sound alarming but I recently read about a case where a 401k plan contained a fund listed as “Vngd Tgt Retrmt 2045 Fund.” whose sole investment was Vanguard Target Retirement 2045 Fund. However, instead of charging an expense ratio of 0.16%, the fund was taking a whopping 0.92%. The only purpose of this sham is to deceive participants into believing they are investing in the real Vanguard fund and marking up the expense ratio exponentially.
Asset allocation
The asset allocation is the most critical factor for investment performance. According to numerous studies, it contributes to more than 90% of the portfolio return. Â As a factor of such significance, it is essential to understand the asset allocation of your target retirement fund.
While comparing five of the largest target retirement families, we see some considerable variations between them. Vanguard has the highest allocation to Foreign Equity, while T. Rowe has the largest investment in US Equity. Fidelity has the highest allocation to Cash and Cash Equivalents while American Century has the biggest exposure to Bonds. And lastly, American Funds has the largest distribution to Other, which includes Preferred Stocks and Convertible Bonds.
2045 SeriesÂ
| Name | Ticker | Cash | US Stock | Non-US Stock | Bond | Other |
| Vanguard Target Retirement 2045 | VTIVX | Â 1.11 | Â Â Â Â 52.98 | Â Â Â Â Â Â Â 34.91 | Â Â Â 9.77 | Â 1.23 |
| T. Rowe Price Retirement 2045 | TRRKX | Â 2.87 | Â Â Â Â 58.98 | Â Â Â Â Â Â Â 28.48 | Â Â Â 9.05 | Â 0.62 |
| American Funds 2045 Trgt Date Retire R6 | RFHTX | Â 3.66 | Â Â Â Â 53.21 | Â Â Â Â Â Â Â 29.02 | Â Â Â 9.77 | Â 4.34 |
| Fidelity Freedom® 2045 | FFFGX |  5.79 |     57.58 |        32.07 |    3.93 |  0.63 |
| American Century One Choice 2045 | AROIX | Â 2.04 | Â Â Â Â 55.38 | Â Â Â Â Â Â Â 20.32 | Â 21.36 | Â 0.90 |
It is also important to understand how the target asset allocation changes over time as investors approach retirement. This change is known as the glide path. In the below table you can see the asset allocation of the 2025 target fund series. All of them have a higher allocation to Bonds, Cash and Cash Equivalents, and a lower allocation of US and Foreign Equity.
2025 Series
| Name | Ticker | Cash | US Stock | Non-US Stock | Bond | Other |
| Vanguard Target Retirement 2025 | VTIVX | Â 1.44 | Â Â Â Â 38.05 | Â Â Â Â Â Â Â 25.09 | Â 34.30 | Â 1.12 |
| T. Rowe Price Retirement 2025 Fund | TRRHX | Â 3.35 | Â Â Â Â 45.64 | Â Â Â Â Â Â Â 22.06 | Â 28.23 | Â 0.72 |
| American Funds 2025 Trgt Date Retire R6 | RFDTX | Â 4.12 | Â Â Â Â 39.60 | Â Â Â Â Â Â Â 19.36 | Â 33.65 | Â 3.27 |
| Fidelity Freedom® 2025 | FFTWX |  8.99 |     41.70 |        24.31 |  24.46 |  0.54 |
| American Century One Choice 2025 | ARWIX | Â 7.18 | Â Â Â Â 40.01 | Â Â Â Â Â Â Â 11.88 | Â 40.01 | Â 0.92 |
 Keep in mind that the target Asset Allocation is not static. Moreover, the fund managers can change the fund allocation according to their view of the market and economic conditions.
Performance
After all said and done, the performance is what matters for most investors and retirees. However, comparing performance between different target funds can be a little tricky. As you saw in the previous paragraph, they are not the same.
So let’s first look at a comparison between different target-date funds from the same family. The return figures represent a net-of-fees performance for 3, 5 and 10 years. Standard Deviation (St. Dev) measures the volatility (risk) of returns. As expected, the long-dated funds posted higher returns over the near-dated funds. However, the long-dated funds come with higher volatility due to their higher allocation to equities.
Target Date Performance Comparison by Target Year
| Return | Standard Deviation | ||||||
| Name | Ticker | 3-Year | 5-Year | 10-Year | 3-Year | 5-Year | 10-Year |
| American Funds 2025 Trgt Date Retire R6 | RFDTX | Â Â 5.71 | Â Â Â 9.36 | Â Â Â Â 5.88 | Â Â 6.78 | Â Â Â 7.48 | Â Â 12.83 |
| American Funds 2035 Trgt Date Retire R6 | RFFTX | Â Â 6.73 | Â 10.43 | Â Â Â Â 6.44 | Â Â 8.70 | Â Â Â 8.84 | Â Â 13.81 |
| American Funds 2045 Trgt Date Retire R6 | RFHTX | Â Â 6.99 | Â 10.67 | Â Â Â Â 6.56 | Â Â 9.09 | Â Â Â 9.10 | Â Â 13.96 |
| American Funds 2055 Trgt Date Retire R6 | RFKTX | Â Â 7.33 | Â 11.32 | Â Â 9.13 | Â Â Â 9.15 |
The comparison between different fund families also reveals significant variations in performance. The majority of these differences can be attributed to their asset allocation, investment selection, and management fees.
Target Date Performance Comparison by Fund Family
| Return | Â | Â | Standard Deviation | ||||
| Name | Ticker | 3-Year | 5-Year | 10-Year | 3-Year | 5-Year | 10-Year |
| Vanguard Target Retirement 2045 | VTIVX | Â Â 6.24 | Â Â Â 9.50 | Â Â Â Â 5.70 | Â Â 9.42 | Â Â Â 9.51 | Â Â 14.63 |
| T. Rowe Price Retirement 2045 | TRRKX | Â Â 6.54 | Â Â Â 9.92 | Â Â Â Â 6.20 | Â Â 9.68 | Â Â Â 9.80 | Â Â 15.80 |
| American Funds 2045 Trgt Date Retire R6 | RFHTX | Â Â 6.99 | Â 10.67 | Â Â Â Â 6.56 | Â Â 9.09 | Â Â Â 9.10 | Â Â 13.96 |
| Fidelity Freedom® 2045 | FFFGX |   6.50 |    8.95 |     4.82 |   9.83 |    9.64 |   15.25 |
| American Century One Choice 2045 | AROIX | Â Â 5.79 | Â Â Â 8.63 | Â Â Â Â 5.73 | Â Â 8.38 | Â Â Â 8.41 | Â Â 13.50 |
How they fit with your financial goals
How the target retirement fund fit within your financial goals is an important nuance that often gets underestimated by many. Target retirement funds assume the investors’ risk tolerance based on their age and the estimated year of retirement. Older investors will automatically be assigned as conservative while they could be quite aggressive if this is a part of their inter-generational estate planning. Further, young investors default to an aggressive allocation while they could be more conservative due to significant short-term financial goals. So keep in mind that the extra layer of personal financial planning is not a factor in target retirement funds.
Final words
Target retirement funds come with many benefits. They offer an easy way to invest for retirement without the need for in-depth financial knowledge. Target funds come in different shapes and forms and bring certain caveats which may appeal to some investors and not to others. If you plan to invest in a target retirements fund, the five questions above will help you decide if this is the right investment for you.
