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The Best Target Date Funds For Retirement

We considered several factors to identify the best target date funds, including fees, performance, asset allocation and glide path.

Fees

Studies show that fees are a good indicator of a fund’s success. The lower the fees, the more likely the fund will outperform its more expensive counterparts. That’s not to say that expenses should be our only criteria, but they are an important one.

Most of the funds in our list have expense ratios below 50 basis points, and the most expensive is 80 basis points. There are target date funds, however, that cost more than 100 basis points. We believe that the performance of these funds do not justify the cost.

Performance

While target date funds have been around since the 1990s, performance data is limited. Because mutual fund companies have made changes to their target date funds, performance data are limited to 5-year returns. Our list will likely change as 10-year returns become available over the next several years.

Asset Allocation

The asset allocation of a target date retirement fund changes over time. In 2060 funds, equities are heavily weighted as investors have 40 years until retirement. In contrast, 2020 funds typically have no more than about 50% in equities, as those retiring in 2020 begin to use fund assets for living expenses.

While we weren’t looking for one “right” allocation, we did look for equity allocations above 80% in 2060 funds. The seven funds in our list typically allocated 90% to equities, although one fund had an 85% allocation. For the 2020 funds we examined, the range of equity allocations was more varied. They ranged from a high of 60% to a low of 35%.

Based on research by William Bengen (and others) on the 4% rule, we believe a retiree should have an equity allocation of at least 50%. As the allocation falls below this level, the longevity of the portfolio decreases. In other words, the odds of a retiree running out of money during retirement goes up. Unfortunately, while some target date funds maintain a 50% equity allocation at retirement, they all fall significantly below this level as the retiree ages.

Glide Path

Glide path describes how the asset allocation of a target date fund changes over time. There are “to” and “through” glide paths. With a “to” glide path, the allocation does not change once the fund reaches its designated year. For example, a 2020 fund’s asset allocation wouldn’t change in 2021, 2022, or even 2040.

In contrast, a “through” glide path continues to alter the asset allocation of a fund after its designated year. All of the funds in our list use a “through” glide path. For some, the changes in asset allocation stop after about five to seven years. For others, the changes continue for decades.

While we are agnostic on the “to” versus “through” debate, the same is not true for the stock to bond allocation. In all target date funds we examined, the equity allocations fall far below the 50% mark. As such, those using target date funds should carefully consider whether these funds best meet their needs in retirement.