My company made Vanguard Target Retirement Funds available for our 401k accounts about two years ago. However, I have not used them preferring to manually manage my own portfolio using traditional funds that include bond, large-cap, small-cap, international stock, and REIT funds. However, Target Retirement Funds are not without merits — in fact, I’ve been using Target Retirement Funds for my SEP IRA.
First let’s start with a brief definition of Target Retirement Funds. A target retirement fund is a mutual fund designed with a specific retirement year in mind (usually in 5 years increment). For example, if you are 35 years old now and you’d like to retire when you turn 65, you can invest in a 2040 Target Retirement Fund. As the fund approaches the target retirement year, the fund allocation becomes more conservative — i.e., investing in more fixed-income investments — to decrease risk and preserve capital.
For example, here’s Vanguard 2010 versus 2040 to give you and idea on how the fund changes over time:
Roughly speaking, Vanguard 2010 is more conservative with 45% allocation to bonds versus only 10% bonds for Vanguard 2040. As time progress, Vanguard 2040 will slowly increase its bonds position.
Personally, I think there are two things that make Target Retirement Funds attractive.
|Vanguard Total Stk Market Idx Fd Inc||72.08%||0.15%|
|Vanguard Total Bond Market Index||10.11%||0.19%|
|Vanguard European Stock Index||9.74%||0.22%|
|Vanguard Pacific Stock Index||4.37%||0.22%|
|Vanguard Emerging Mkts Stock Idx||3.66%||0.37%|
However, there are also a few things that make Target Retirement Funds unattractive:
There are also a few other things you may want to consider when investing in Target Retirement Funds.
As mentioned before, owning other investments in addition to a Target Retirement Fund can actually work against you due to skewing. This means that if you want to get into a Target Retirement Fund you may have to consider liquidating existing portfolio, or at least, be very careful with its asset allocation. This could be a problem for investors with large existing portfolio due to trading costs and potential tax consequences (i.e., especially for investments in taxable accounts).
Secondly, some Target Retirement Funds are actively managed and there’s a potential that your fund manager may stray from the stated investment policy. For example, he or she may be investing more aggressively than stated in order to outperform other Target Retirement Funds. This is especially worrisome for investors who are near their retirements.
Note: this is not the case with Vanguard Target Retirement Fund which is made up of index funds.
Personally, I am still undecided whether I should leverage a Target Retirement Fund or not. I enjoy managing my own portfolio, and there are some disadvantages to consider. However, I think investing in a Target Retirement Fund in my non-401k accounts might be a good option — this will certainly make life simpler. Also, I think Target Retirement Funds are good for people who don’t want to bother managing the portfolio on their own; and this is far better than neglecting the portfolios altogether.
What’s your thought on Target Retirement Funds? Do you invest in them? What do you like or dislike about them?