The Vanguard Group published recently its “How America Saves 2018” report, a trove of data on more than 4.9 million retirement savers in 401(k)s, 403(b)s and other defined-contribution plans.
My colleague Barry Ritholtz has already noted many of the highlights, but one detail deserves more exploration: Target date funds are taking over retirement accounts.
The numbers are astonishing. Roughly half of retirement savers invested their entire account in a single target date fund in 2017. None did so as recently as 2004. Vanguard estimates that number will grow to 70 percent by 2022.
Retirement plans are fond of target date funds, too. Vanguard estimates that 46 percent of plans had adopted automatic enrollment for participants in 2017, up from 2 percent in 2004. And of those, 97 percent chose target date funds as the default investment option.
For the uninitiated, target date funds are billed as a one-stop retirement savings plan. Each fund holds a mix of stocks and bonds and targets a future year of retirement. As that year approaches, the fund becomes increasingly cautious, shifting more of its allocation from stocks to bonds. For example, a target date 2060 fund might start with a 90/10 allocation to stocks and bonds and gradually glide to a 40/60 allocation by 2060.
It’s not surprising that target date funds are a hit. For retirement savers, they’re far easier than cobbling together a portfolio from a grab bag of mutual funds. They’re also a boon for retirement plans, which have shown little interest in educating participants about how to assemble a sensible retirement portfolio. Target date funds give them an excuse to dodge that task altogether.
But target date funds are no cure-all. One obvious defect is fees. I counted 227 retirement share class target date funds with $100 million or more in net assets. Their average expense ratio is 0.67 percent a year, and their asset-weighted average expense ratio — which accounts for the size of the funds — is 0.58 percent.
It’s hard to understand why a fund so simple should cost so much, particularly when the building blocks of target date funds — broad-based baskets of stocks and bonds — can be had for a fraction of the cost through index funds. Vanguard gets it. Its institutional share class target date funds charge just 0.09 percent a year, which is the cost of the underlying Vanguard index funds they hold. It’s no coincidence that Vanguard boasts the biggest target date funds. (Disclosure: I’m a Vanguard investor.)