How to Choose a Target-Date Fund
Expenses and glide path are just two factors that investors should consider.
Jeff Holt: An investor looking to put their retirement savings in a target-date fund simply selects a fund with a target date in its name that most closely corresponds to the year they plan to retire. For example, if a 43-year-old investor plans to retire at age 65 in the year 2041, they would select a target-date fund with 2040 in its name. Target-date funds have diversified portfolios and are designed to be the single holding for retirement savings, so investors generally do not need to invest in multiple target-date funds.
Investors should note that the investment approach varies by target-date provider. And while target-date funds are meant for investors who want to hand over the asset-allocation decisions to professionals, there’s a few things that investors can peek at to build their confidence in their choice.
First, they can look at the strategic equity glide path. This glide path shows how the funds’ managers plan to balance the stock/bond split at different points before and after retirement. Investors may want to pay close attention to the expected equity exposure at the target date, and what happens after the target date, to make sure they are generally comfortable with the approach. Comparing a glide path with the average also provides insight into how relatively aggressive or conservative it may be.
Second, investors may want to look at a fund’s expense ratio to make sure they aren’t paying too much. Target-date funds that invest only in index funds generally have expense ratios around 0.10%, whereas ones that hold actively managed funds typically have expense ratios closer to 0.50%.
There’s much more to target-date funds than the equity glide path and expense ratios. Morningstar analysts issue forward-looking ratings on the most prominent target-date funds available, digging deeper into the portfolio management teams, the execution of the approach, and underlying sub-asset-classes, among other factors. Investors can use the Morningstar Analyst Ratings as an independent view formed after comprehensive evaluation.