Target Date Funds -- not so simple!

[OldShooter]

Using target date funds is a frequent recommendation from folks here. In making such a recommendation, I for one, have been guilty of thinking that all target date funds are similar for a similar target date. Maybe everyone else knew this, but I recently learned that this assumption is wrong. The investment mixes, aka glide paths, vary quite dramatically among fund families.

(from AAII): " A significant difference among the fund families centers on when these target funds finally touch down and become, essentially, income funds. ...

"All of the families offer a retirement income fund for investors who are beyond their “target” dates. However, within the Vanguard target date family, a target date fund’s allocations converge with the asset allocation of the income fund seven years after the target date is reached. Fidelity’s final touchdown is 10 to 15 years after the target date, T. Rowe Price’s is 30 years, and Schwab’s is 15 years."
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Here are some links:

https://www.ici.org/pubs/faqs/faqs_target_date

https://money.usnews.com/investing/...ow-to-evaluate-a-target-date-funds-glide-path

https://www.aaii.com/investing/arti...etirement-a-look-at-target-date-mutual-funds?
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For my adult-ed investment class I am going to increase emphasis on glide paths, particularly for people who have 401K plans, which typically offer just one family of target date funds. In such a case, a target date fund might be right if the glide path is right, but otherwise the participant may have to make their own target date fund via a changing AA.

 

[njhowie]

From what I've seen, each mutual fund company constructs their target date funds by simply taking a basket of their other funds and adjusting the percentages. By varying the percentages of each of those funds within the target date fund, they get their spectrum of least aggressive to most aggressive.

 

[OldShooter]

From what I've seen, each mutual fund company constructs their target date funds by simply taking a basket of their other funds and adjusting the percentages. By varying the percentages of each of those funds within the target date fund, they get their spectrum of least aggressive to most aggressive.

Yes, that was my understanding too and in broad brush it's correct. The new news to me was that it's quite a bit more complicated than that. Some glide paths start with a decade or two of fixed AA, mostly equity, then the proportion starts to shift as retirement nears. Others begin shifting right away. Then, after the target date the amount of equity that some funds hold may become fixed fairly quickly or not. The point is that glide paths from different managers can be radically different.

 

[kevink]

Not only are the glide paths different but there are significant differences in the stock allocations both initially and over time among the leading brokerages. Good recent thread on this over on Bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=325157

I also wanted to recommend McClung's "Living Off Your Money" as the most comprehensive guide to planning retirement spending I know of, because it also shows how unsophisticated glide path and bucket approaches to retirement are.

Investing During Retirement

 

[ProspectiveBum]

Thanks, Oldshooter, a good variable to be aware of. Something that confuses me a bit about target date funds and glide paths: am I correct in assuming that these aren’t as useful once you’re actively withdrawing from them? Part of the point of keeping assets in “safer” asset classes is that you can withdraw from those when the markets are down, allowing your equities time to recover. This wouldn’t be possible with a target date fund, correct? Because every withdrawal would pull from each of the asset classes within the fund in whatever percentage each constitutes?

 

[OldShooter]

Thanks, Oldshooter, a good variable to be aware of. Something that confuses me a bit about target date funds and glide paths: am I correct in assuming that these aren’t as useful once you’re actively withdrawing from them? Part of the point of keeping assets in “safer” asset classes is that you can withdraw from those when the markets are down, allowing your equities time to recover. This wouldn’t be possible with a target date fund, correct? Because every withdrawal would pull from each of the asset classes within the fund in whatever percentage each constitutes?

Yeah. It has to work that way. One of the reasons I am not fond of any blended fund. The other reason, actually more important to me, is that I can't determine the performance of just the equity tranche. Once the red Kool-Aid and the green Kool-Aid are mixed, you can't tell where the resulting color and flavor came from. But maybe after retirement target date funds lose their usefulness for just the reason you suggest.

Subject to this glide path issue and assuming the equity portion is in a broad index, I think target date funds do fill a need. But they are more complicated than they look.

 

[Texas Proud]

I only recommend them to people that want simple... where one fund is all they want to deal with..


Saying that, I also recommend that they look at the allocations and as you all it, the glide path... for some that means picking a fund 10 to 15 years after their target date... for others it is sooner...


I did not know there was that much variation between fund families, but will note that going forward.

 

[kevink]

Yeah. It has to work that way. One of the reasons I am not fond of any blended fund. The other reason, actually more important to me, is that I can't determine the performance of just the equity tranche. Once the red Kool-Aid and the green Kool-Aid are mixed, you can't tell where the resulting color and flavor came from. But maybe after retirement target date funds lose their usefulness for just the reason you suggest.

Subject to this glide path issue and assuming the equity portion is in a broad index, I think target date funds do fill a need. But they are more complicated than they look.

At least with Vanguard the equity allocation is transparent - set percentages of Total U.S. Stock Market Index and Total International - but if you're not comfortable with 40% International (as well as holding Int'l bonds) or - perhaps equally important - not willing to sign on for further monkeying with the allocations on their part they're not the best choice.

Clearly the target date funds are valuable for large numbers of folks who aren't sophisticated about investing and don't wish to be, or who have limited options in their 401(K)s. For them the automatic rebalancing and inability to screw up the equity-to-fixed ratio through active trading/market timing more than offsets the negatives.

 

[donheff]

Thanks, Oldshooter, a good variable to be aware of. Something that confuses me a bit about target date funds and glide paths: am I correct in assuming that these aren’t as useful once you’re actively withdrawing from them? Part of the point of keeping assets in “safer” asset classes is that you can withdraw from those when the markets are down, allowing your equities time to recover. This wouldn’t be possible with a target date fund, correct? Because every withdrawal would pull from each of the asset classes within the fund in whatever percentage each constitutes?

This is the aspect on target date funds that I don't like. I want my assets individually accessible and I want bonds in pretax and equities in taxable to the extent practicable. For the kids and friends who ask I recommend TD funds as a simple route to a professionally assembled portfolio for an IRA or 401K where later breaking them up won't result in taxable events. But I also recommend that as they start building taxable and Roth accounts, they learn to use the target funds as models for their overall portfolio AA and take some time to determine optimal placement of the component funds.

 

[NoiseBoy]

I was just looking at the current asset allocation of the target fund that I am mostly invested in for my mega-corp 401k today and happened to look at its glide path. The equity allocation begins at ~90% and stays there until 25 years before time zero. Then it begins a very gradual decline that accelerates a bit at the -5 year point until it reaches what looks to be about ~30% equities at 0. I don't know if there are other changes to the Bonds & Cash portion after time 0, but the glide path chart doesn't show any further changes to the equity/bonds & cash balance (colored parts of the chart) after time 0. The chart does have a bar at time 0 whose color corresponds to "steady state allocation" in the legend.

 

[Lawrencewendall]

In 2009 I put 10k into a 2025 fund through FIDO to see how they matched up with me doing stuff on my own. As of today, it's up 131%. Can't complain.

 

[steelyman]

I remember reading some general-audience article about target date funds from a few big companies (Fidelity, Vanguard, Price) back when they were first introduced. One of the assessment criteria was “aggressiveness” of the allocations. This was a while ago.

I use a target date fund (Vanguard 2030) as a benchmark against which to assess the performance of my actual retirement portfolio. They (Vanguard) had been judged “middle of the pack” in the article. They ratchet down the stock allocation until the target date is reached, then settle into Target Retirement Income Fund (30/70). I’m thinking of moving to a stable 60/40 mix once the 2030 fund gets there. It’s currently ~67/33.

 

[OldShooter]

I was just looking at the current asset allocation of the target fund that I am mostly invested in for my mega-corp 401k today and happened to look at its glide path. The equity allocation begins at ~90% and stays there until 25 years before time zero. Then it begins a very gradual decline that accelerates a bit at the -5 year point until it reaches what looks to be about ~30% equities at 0. I don't know if there are other changes to the Bonds & Cash portion after time 0, but the glide path chart doesn't show any further changes to the equity/bonds & cash balance (colored parts of the chart) after time 0. The chart does have a bar at time 0 whose color corresponds to "steady state allocation" in the legend.

So ... the questions become: 1) Is that what you expected? and 2) Is is acceptable? No wrong answers here. Just curiosity, especially about Q #1.