Can Pricey Target-Date Funds Be Competitive?

Great article by Morningstar that rips into high cost Target Date funds. If you don't know what a target date mutual fund is you are not alone, they are relatively new.

A "Target Date" mutual fund is supposed to be a one-stop fund that a person can utilize for retirement. You pick a retirement date (or one that is close to the funds Year) and the fund does the rest, including the asset allocation and becoming more conservative as you get closer to your retirement date.

For example, if you plan to retire in 2035 (my planned phase out date) you might choose the Vanguard Target Retirement 2035 fund (VTTHX, expense ratio .21%). This fund currently has an asset allocation that is 87.5% Stocks and 12.5% Bonds and will slowly adjust as the years pass by so that by the time I am retired (or phasing into retirement) the allocation will have adjusted to 42% stocks and 58% bonds.

I am a fan of the Target Date concept, but not of the implementation. Currently most target date funds are too expensive (the point of the Morningstar article). The ones that are priced well (Vanguard) aren't diversified enough. At this point I haven't found a target date fund that I like. Other problems with Target Date funds are that you can't customize a persons portfolio to fit them or to adjust to different economic environments.

I believe that as this concept evolves the expenses will come down and they will be better diversified. I also believe that these funds are best used in retirement plans like 403(b), 457(b), or 401(k) . They are also best used for smaller account levels, as your asset grow so should your asset allocation strategy.

Scott Dauenhauer, CFP, MSFP