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Should Investors Create Their Own Target-Date Fund?

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Do-it-yourself investors, especially younger ones, can save money by re-creating their own target-date fund, a professor finds

Target-date retirement funds are often found in company 401(k)s, IRAs and other investment vehicles. But many investors in such funds wonder if they couldn’t get similar or better returns by putting together replica versions, without the fees.

We ran a little test and discovered that, as long as you have the time and diligence to monitor and adjust your portfolio over time, then yes, the do-it-yourself version does on average outperform the original target-date fund by eliminating its fees and expenses.  

A target-date fund is most often a mix of stocks and bonds in which the allocation of investments goes from riskier to more conservative as the investor’s retirement year approaches. An investor preparing for retirement in 2040—the average year, currently, for all target-date-retirement funds—can save an average of 0.14 percentage point in expenses and fees a year, which translates to more than 2 percentage points in cumulative returns over a 10-year period.

And, even better, if you are a younger investor with an approximate retirement date of 2060, you can save an average of 0.17 percentage point in fees a year, which can yield a boost of more than 3 percentage points in cumulative returns over a 10-year period.

The research

To implement this study, my research assistant Tyler Harb and I first collected allocation data from the prospectuses of all U.S.-based target-date retirement mutual funds. Many were very specific about what they were invested in (other mutual funds, mostly) and how big the allocation was. Some wouldn’t reveal the names of funds in which they invested but described them in specific enough terms that we could identify them as, say, a large-cap or midcap U.S. equity fund. Using this data, for each target-date fund we created a replica fund with the same contents and allocations, then ran market simulations to see what kind of returns an investor would get using a DIY version compared with its original.

To give each target-date fund a fighting chance against its replica, we picked its lowest-cost option within the different share classes. For the funds we put in the replicas, we picked the share class with the most assets under management. We then gave each investment within the replicas the same weighting as was present in the original fund.

The first interesting finding is that, on average, an investor in a brand-name 2040 target-date fund can expect to pay an expense ratio of about 0.32 percentage point a year. But if investors wanted to construct the same fund (using the same fund family mutual-fund offerings), they could do it for just around 0.18 percentage point a year. This amounts to an excess in returns of 2.5 percentage points over a 10-year period.

A payoff for younger investors

The second interesting finding is that for longer-dated retirement funds—for younger people who won’t retire until decades from now—the saving is even greater.

DIY Pays Off

Excess returns that one can get by ‘doing it yourself’ instead of buying the target-date fund.

Excess returns over a 10-year period

Expense ratio for target-date fund

Expense ratio for matched ‘do it yourself’ fund

Excess returns over a 10-year period, by targeted retirement-year










Investors buying a brand-name 2060 target-date fund can expect to pay an expense ratio of 0.34 percentage point a year. If they construct the same underlying fund, they could do it for an average of 0.17 percentage point a year (using the same fund-family offerings). This amounts to a boost of more than 3 percentage points in returns over a 10-year period.

One factor in this advantage to younger investors is that as the retirement date of a fund goes further into the future, the fund manager is eschewing short-duration debt, inflation-protected bond funds and high-dividend-paying stocks for more large-cap stock, international stock and small-cap stock funds. This difference in holdings on average saves the investor a few hundredths of a percentage point in expense ratios. The second factor is that as the retirement date on a fund goes farther into the future, the fund family is charging more for this product—perhaps because younger investors are less price-sensitive when it comes to investing.

As for the positive side of target-date funds, 10% of the funds in our sample were actually sold “at cost”—meaning that the target-date retirement fund expense ratio matched the weighted average of the underlying components. So an investor wouldn’t save any money by trying to replicate these target-date funds.


What’s your opinion of target-date funds? Join the conversation below.

On the flip side, more than 10% of target-date funds had an expense ratio in excess of 0.60 percentage point a year greater than the DIY portfolio. The result: Investors replicating the target-date fund would earn over 10% more in returns over a 10-year period.

In all, adventurous and diligent investors (especially younger investors) should note the cost savings to creating their own fund. Of course the downside to doing it yourself is the desire to time markets and rebalance too often. But if one can control that urge, a do-it-yourself portfolio can net you a few percentage points in retirement.

Dr. Horstmeyer is a professor of finance at George Mason University’s Business School in Fairfax, Va. He can be reached at

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