Fund Spy

Fees Increasingly Important to Target-Date Fund Performance

Jason Kephart, CFA
Kathryn Wing

Key Takeaways

  • Fees to continue to play a meaningful role in the due diligence process of target-date funds as performance becomes more similar among peers.
  • Target-date fund fees are falling, but the cheapest funds have fallen at a faster pace than the most expensive over the past 10 years.
  • Despite a wide range of investment philosophies, target-date funds' performance is becoming more alike.
  • Fees have explained more of the performance difference between target-date funds further from retirement than those closer.
  • Over the five years ended Oct. 31, 2018, fee differences accounted for roughly 28% of the performance difference between top-quintile and third-quintile 2040 funds, but only 7% of the same gap in 2020 funds. Both were still higher than the longer-term average, however. This argues for fees to continue to play a meaningful role in the due-diligence process of target-date funds even as performance becomes more similar among peers.

If fee differences narrow, will fees remain a useful predictor of future fund performance, as our research has found to this point? In October, Morningstar tackled the question for U.S. equity funds and found that as the performance of equity funds has become similar, fees have explained more of the difference in funds' afterfee returns than in the past. In this Fund Spy, we'll apply a similar methodology to target-date funds to determine if fee differences still largely explain net-of-fee performance differences among funds.