Target Date funds are a favorite for new investors because they automatically rebalance and shift to a more conservative allocation as retirement approaches. At the low-cost brokerages, the expense ratios for target date funds are relatively low. Let's take a look under the hood to see if there are any differences between target date funds at Vanguard, Fidelity, and Schwab.
Vanguard
Expense Ratios: 0.08%
Minimum to invest: $1000
Glide Path: The fund starts to become more conservative 25 years before retirement. It levels out 7 years after retirement.
Asset Class | Early | Retirement | Final |
Equities | 90% | 50% | 30% |
Fixed Income | 10% | 50% | 70% |
Fidelity Freedom Index Target Date Investor Fund
Expense Ratios: Make sure you choose an INDEX target date fund. Index target date funds have an expense ratio of 0.12%. Actively managed ones have expense ratios ranging from 0.47-0.75%!
Minimum to Invest: 0$
Glide Path: The fund keeps the early allocation until about 20 years before retirement when it starts to become more conservative. It levels out 20 years after retirement.
Asset Class | Early | Retirement | Final |
Equities | 90% | 54% | 19% |
Fixed Income | 10% | 46% | 81% |
Schwab
Expense Ratios: Make sure you choose an INDEX target date fund. Index target date funds have an expense ratio of 0.08%. Actively managed ones have expense ratios ranging from 0.3-0.68%!
Minimum to Invest: $1
Glide Path: Schwab has a smoother glide path that starts becoming more conservative 45 years before retirement. The curve is less dramatic after retirement, and it levels out 20 years after retirement.
Asset Class | Early | Retirement | Final |
Equities | 97% | 44% | 28% |
Fixed Income | 3% | 56% | 72% |
Considerations
One criticism of target date funds is that they tend to hold more fixed-income assets earlier than is necessary. The funds also tend to become slightly more conservative earlier than necessary. One way to adjust for a more aggressive portfolio is to choose a later target date.
Vanguard chooses to time its final allocation only 7 years after retirement. Alternatively, Fidelity and Schwab set the final allocation at 20 years after retirement. Fidelity's final allocation is slightly more conservative than Schwab and Vanguard's allocation.
Fidelity also has a higher expense ratio than Vanguard and Schwab, although all three a quite affordable. Of note, these expense ratios are still more than if you manage a portfolio of funds yourself. However, many investors prefer the convenience of a target date fund over managing a portfolio. If you would like more control over your allocation, but prefer automatic rebalancing, you might consider a robo-advisor. You can read a comparison of different robo-advisors here.
If your account is already held at one of the brokerages, you will likely want to go with the target date fund provided by them to avoid any transaction fees. Most brokerages charge a fee to buy and sell a competitor's mutual fund. However, if you are considering opening a new account for your target date fund, this comparison may help you decide which brokerage is the best option for you. You can read a comparison of Fidelity, Schwab, and Vanguard here.
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