Taking Apart Target Date Funds

Target date funds are becoming more popular, especially in 401(k) plans. These are funds that change their asset allocation over time based on the assumed age of the shareholders. For example a target date 2020 fund is supposed to be owned by someone who plans to retire in 2020. But these are a new part of the mutual fund world, so they have little history. There also are a lot of differences between funds offered by different companies. This article from Morningstar has some interesting charts and analysis about target date funds. One point of interest: Target date funds filled with index funds aren’t always the least expensive.

It is common to look at and compare target-date series by their overall equity and bond allocation over time; this high-level examination tends to be the primary driver of results, particularly in times of severe market stress. However, comparing series’ equity glide paths only scratches the surface in identifying the differences in target-date managers’ approaches. In addition to the overall equity exposure, target-date managers also make decisions for multiple subasset classes. Exhibit 2 shows the industry average sub-asset-class glide path based on actual holdings as of Dec. 31, 2014, across 10 distinct subasset classes.