Target Date Funds Fees and Your Retirement Savings

The fees associated with target date funds can eat into your retirement savings, with some funds charging as much as 2% of your investment annually. This may not seem like a lot, but it can add up over time.

For example, if you invest $10,000 in a target date fund with a 2% annual fee, you'll pay $200 in fees the first year alone. As the years go by, the fees will continue to add up, potentially reducing your retirement savings by thousands of dollars.

Some target date funds have even lower fees, such as 0.15% to 0.20%, but it's still essential to understand what you're paying and how it might impact your long-term savings.

Target-date funds are designed to help manage investment risk by shifting assets to lower-risk investments as you get closer to retirement.

You pick a fund with a target year, like a "2050 Fund", and the fund gradually rebalances and reallocates assets to reduce risk over time.

A fund's glide path is designed to reduce investment risk, but glide paths can vary considerably from fund to fund, affecting how risky they are and what they're worth.

Target-date funds don't provide guaranteed income in retirement and can lose money if the stocks and bonds owned by the fund drop in value.

Investors pick a target year, and then the fund management company manages everything, shifting assets from riskier investments to more conservative ones, like bonds and cash, as you get closer to retirement.

A target fund is a type of mutual fund or exchange-traded fund that gradually adjusts its investment strategy as you get closer to retirement. It's designed to be a one-stop investment shop with a diversified set of asset classes.

You pick a fund with a target year that matches your expected retirement date, such as a "2050 Fund." The closer the fund gets to its target date, the more it shifts its assets to lower-risk investments like bonds and cash.

Target-date funds are not risk-free, and even when the target date is reached, they can still lose money if the stocks and bonds in the fund drop in value. They also don't provide guaranteed income in retirement.

Investors can pick the year they think they'll need to access the funds, and the fund management company will manage everything from there.

Target funds are a type of investment that can be a great option for those looking for a hands-off approach to investing. They're typically structured as a mutual fund, which means the investments are determined by the fund's objectives.

Most target funds are a "fund of funds", investing in other mutual funds rather than individual securities. This structure allows for a diversified investment portfolio.

One of the benefits of target funds is that they provide an easy way to hold a diversified investment portfolio that rebalances over time. As the target date approaches, the investment mix becomes weighted more heavily toward fixed-income or cash equivalent investments.

Stocks have historically provided a higher return than bonds and cash investments, but this is not always the case. Even though target-date funds are designed to become more conservative as the target date approaches, investment risk exists throughout the lifespan of the fund.

American Funds Target Date Retirement funds have posted the best returns relative to their peers in each vintage. For example, the 2035 Target Date Retirement fund has outpaced its typical peer over the past 11 calendar years.

The expense ratios for American Funds' target-date retirement funds hover at an average of 0.39%, which is relatively low considering they're actively managed.

A target-date fund is a type of mutual fund or exchange-traded fund.

There are different types of target-date funds, including those that gradually rebalance and reallocate assets as you get closer to retirement.

These funds are designed to be a one-stop investment shop with a diversified set of asset classes, which is typically managed by the fund management company.

The investor picks the year they think they'll need to access the funds, and the fund management company takes care of the rest.

Fees can add up to a big dollar difference in the returns on your mutual fund, so be aware of all the fees associated with any fund you invest in.

A small percentage difference in fees can make a significant impact on your investment returns.

You can compare the fees and expenses of different funds using FINRA's Fund Analyzer.

It's also essential to consider your overall investment portfolio and how it affects your target-date fund holdings.

An outsized holding of stocks or bonds elsewhere can increase your weighting in those asset classes overall.

Don't assume that a target-date fund will automatically adjust to changes in your portfolio, situation, or risk tolerance over time.

You need to monitor the fund's performance and assess whether its investments continue to meet your needs and risk tolerance.

If you hold a target-date fund outside a tax-advantaged account, be aware of the tax consequences, including income from interest, dividends, and capital gains distributions.

Target-date funds have become more popular and had to compete against cheaper funds, resulting in significantly lower fees. Their asset-weighted average expense ratio was 0.32 percent at the end of 2022, according to Morningstar.

An investor would pay $32 annually for every $10,000 invested in a target-date fund, which is down from $66 annually in 2017.

The average expense ratio of target-date funds is still higher than that of ETFs, but they compare well to the average mutual fund.

Fund expenses can add up, and it's essential to compare these expenses before selecting a target-date fund for your money. You may notice that some target-date funds carry higher fees than the index funds within them.

American Funds' target-date funds have posted the best returns, relative to their peers in each vintage, and have an average expense ratio of 0.39% for the oldest share class.

This is more than some target-date series made up entirely of index funds, but it's relatively cheap for active managers.

Expense ratios hover at an average of 0.39% for American Funds' target-date funds, which is a significant decrease from 0.66 percent in 2017.

Target-date funds have some disadvantages compared to other funds. They can be inflexible, making it difficult to adjust your investment strategy if your financial goals change.

One notable disadvantage is that target-date funds often have high fees, which can eat into your returns over time.

American Funds' target-date funds have consistently outpaced their peers in returns over the past 11 calendar years since 2013.

The 2035 Target Date Retirement fund has been a standout performer, beating its typical peer each year. Actively managed funds are used in the target-date portfolios, which may appeal to investors seeking more control over their investments.

Many of the underlying funds in the American Funds series earn high marks from Morningstar, which can be reassuring for investors. The expense ratios for the oldest share class of these funds average 0.39%, which is relatively low for actively managed funds.

However, some of the underlying holdings in this series have posted middling returns relative to peers in recent years, which may be a concern for investors.

Target-date funds have some disadvantages compared to other funds. One of the main disadvantages is that they often have higher fees than other types of funds.

These higher fees can eat into your investment returns over time, which can be a significant disadvantage. In some cases, the fees can be as high as 1% or more of your investment.

This can be a major drawback for investors who are trying to save for retirement or other long-term goals. It's like paying a premium for a service that you could get elsewhere at a lower cost.

Target-date funds also tend to be less flexible than other types of funds. Once you've invested in a target-date fund, it can be difficult to change your investment strategy or withdraw your money.

Target-date funds provide an easy way to hold a diversified investment portfolio that rebalances over time to become less focused on potential growth and more focused on producing income.

Most target-date funds are structured as a "fund of funds", meaning they invest in other mutual funds rather than in individual securities. This can be beneficial for investors who want a hassle-free investment experience.

Target-date funds typically shift the majority of assets from riskier investments such as stocks to more conservative investments such as bonds and cash as the target date approaches.

The investment mix of a target-date fund becomes weighted more heavily toward fixed-income or cash equivalent investments, including bonds and Treasury securities, as the target date nears.

American Funds Target Date Retirement funds have posted the best returns, relative to their peers, of any other fund family highlighted here. Over the past decade, each vintage of these funds has been less volatile than its respective peer.

The expense ratios of American Funds' target-date retirement funds hover at an average of 0.39% for the oldest share class, which is relatively low compared to other active managers.

Target-date funds can be a simple way to spread your money across investments that match your age and retirement needs, but not all funds of the same target date are created equal.

To determine if a target-date fund is a good investment for your needs, read the fund's prospectus and review the current portfolio breakdown and fee structure.

Each of the Target Retirement Funds invests in Vanguard's broadest index funds, giving you access to thousands of U.S. and international stocks and bonds. This diversification can help reduce risk and increase potential returns.