Target date mutual funds are designed to automatically adjust their allocation depending on how long you have until the “target date.” These funds thus invest rather aggressively early on, automatically moving to a more conservative allocation over time.
While these funds are a convenient “set and forget” solution for many investors, they’re not for everyone. I’ve previously outlined four disadvantages of target date mutual funds, so I won’t rehash them here. Instead, I’ll focus on costs.
According to a recent report from the Wall Street Journal, target date funds are cutting costs by eliminating managements fees and/or moving to a less expensive combination of underlying funds.
To be fair, companies such as Vanguard were already offering low cost target date funds. But others? Not so much. The pressure to reduce costs is coming in part from large, employer-run retirement plans, but everyone stands to benefit.
For their part, Fidelity is launching a series of “Fidelity Freedom Index Funds, ” and Schwab has reduced their fees by 0.13%. The new Fidelity funds will be available in five-year increments with target dates ranging from 2000 to 2050. Presumably the 2000 and 2005 versions are for people who are already retired.
A number of others are dropping their “wrap” fees, which are really unnecessary given that most target date funds invest in funds from the same fund company. For what it’s worth, neither Vanguard nor Fidelity have been charging wrap fees on their funds.
Are you a target date fund fan?
As I noted above, I’m not crazy about them, but it’s for reasons other than cost.