What Mutual Fund Type Is Taking Over 401(k) Plans?

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May 18, 2015
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Activity, Question of the Day, Index Funds, Investing, Mutual Funds, Stocks, New Products, Current Events

From Bloomberg:

Their name:  Target Date funds.
Their share of 401(k) contributions in 2015:  More than half expected in 2015.
Their appeal: Simplicity (“the only fund that you will need”) and low fees.
Selection process: Choose target-date fund close to your retirement. If you are starting to work now and expect to retire in 40 years, then choose Target Date Fund 2055.
Composition: Mix of Stock/Bond funds (index funds preferred) that adjusts; as investor gets closer to retirement, moves more into bonds.
Fees: Average of 0.78%.  Vanguard as low as 0.17%

One way to deepen students understanding of this product is to compare two of the larger offerings: Vanguard and Fidelity.  Have them compare these funds across the following dimensions:

  • Fees (aka Expense Ratio)
  • Performance (1 and 3 years)
  • Allocation between stocks/bonds in these categories (Composition Tab):  Domestic equity (stock), International equity (stock), Bond Funds (combine Domestic and International), Short-term Funds (cash).  Also, calculate how much stocks are as %age of overall portfolio.
  • Number of funds held: How many funds make up each of the target date funds?  Are Vanguard and Fidelity pursuing active or passive strategies? Does this give you a better sense of why fees might differ with Target Date funds?

Based on this information, which fund would students choose and why?

Bonus question:  What would be the composition of funds in 2055 (at retirement)?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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