10 of the Best Target-Date Fund Families
The best target-date funds are a 'set it and forget it' approach to your retirement, but which fund family should you trust your money?
Target-date funds are a core component of many investors' retirement strategies. And for good reason: These funds provide a one-stop shop for retirement investors.
Every target-date fund adjusts its asset allocation from more aggressive and growth-oriented holdings in the early savings years to more conservative capital-preservation strategies as investors near and enter retirement. All investors need to do is choose the fund that most closely aligns with their target retirement date, and the portfolio managers will take care of the rest.
However, choosing is easier said than done.
Target-date funds vary in their cost, structure and methodology. While one 2050 target-date fund may use 90% stocks, another could hold only 60% stocks. These differences can result in widely different investment experiences for participants.
In general, when evaluating target-date funds, keep the following in mind:
- Cost: All target-date funds require some degree of active management, as someone has to make the rebalancing decisions for you. But costs will vary depending on what these funds invest in. Some target-date funds hold lower-cost index funds while others use active funds that are pricier, but might provide the potential for higher returns or a less volatile investment journey.
- "To" versus "through" glidepaths: A target-date fund's glidepath is how it manages the level of risk, or equity (more risky) versus fixed-income (less risky) exposure, throughout an investor's lifetime. Some funds reach their lowest equity allocation at the target retirement date and then maintain that exposure throughout retirement, known as a "to" glidepath, because they manage to retirement. Other funds manage through retirement by continuing to de-risk after (or through) the target retirement date. The "to" glidepath strategy argues that the riskiest day of an investor's financial life is the day she retires. Managers of "through" portfolios would argue that because investors are living for 30-plus years in retirement, they need a higher allocation to growth investments at their retirement date.
- Aggressiveness: Target-date funds offer varying degrees of aggressiveness. The fund families on our list range from 99% equities in the early years to 82% equities; in retirement, they range from 55% equities to only 8%. Funds heavier in stocks have higher growth potential, in theory, but they're riskier and have the potential for more volatile returns.
Read on as we look at the distinguishing features of 10 of the industry's best target-date fund providers.
Fund families listed in alphabetical order.
We'll start with the American Funds Target Date Retirement Series, which focuses on balancing investors' two primary objectives when investing for retirement: building wealth, then preserving wealth.
The funds aim to accomplish this by using a glidepath-within-a-glidepath strategy. By shifting into larger-cap, dividend-paying equities around and into retirement, the funds are able to mitigate some volatility without needing to lean more heavily on fixed income.
"At age 65, investors still have a long investment horizon, they need meaningful equity exposure, but the amount and types of equities they hold should continue to change as they sustain distributions in retirement," says Rich Lang, investment director of the American Funds Target Date Retirement Series. "Our objective based glide path differentiates the volatility of equities used across the series, allowing older participants to hold more equities, with less volatility than peers."
American Funds' target-date funds start at a 90% equity allocation, moving to 45% equities at retirement and finally settling at 30% equity. That puts this family around the middle of the pack in terms of degree of equity exposure.
American Funds also gives fund managers the ability "(within a reasonable range) to select the most appropriate asset class to help participants best achieve their objectives," Lang says. "This focus on the outcome (ends) versus the means (asset class) provides the Series with a degree of flexibility that has benefitted participants over its lifetime and more recently via a tactical tilt toward larger-cap and U.S. equities."
BlackRock manages three series of target-date mutual funds, all of which are only available in retirement plans.
"LifePath Index is a low-cost, long-horizon strategy which uses index building blocks," says Nick Nefouse, co-head of the LifePath target-date lines at BlackRock. "LifePath Dynamic seeks to provide higher risk-adjusted returns than LifePath Index utilizing the full BlackRock platform. Our newest offering is LifePath ESG, which incorporates ESG indices into the target-date fund series."
Each series uses the same research and glidepath, going from 99% equities in the early accumulation years to 40% at and through retirement. Unlike most of the other target-date funds on this list, BlackRock's funds don't continue to de-risk into retirement.
"The riskiest day of your financial life is the day you retire, so we have our lowest equity weight at the point of retirement," Nefouse says. This landing point of 40% equity and 60% high-quality fixed income is a reflection of "LifePath's retirement objective (of) maximizing spending, limiting spending volatility and addressing longevity risk."
Dating back to 1993, the LifePath series have seen more changes and market cycles than any other target-date fund manager, he says. "Our research has continuously evolved; most recently around incorporating lifetime income as an asset class into a (target-date fund)."
The LifePath Index series has the distinction of being the only Gold-rated index target-date series by Morningstar. The LifePath Dynamic funds are rated Bronze and the ESG offering is not yet rated.
Fidelity has been in the target date space for 23 years. It provides three types of target-date funds, which can be distinguished by the type of underlying funds each invests in:
- Fidelity Freedom Funds invest in primarily actively managed funds.
- Fidelity Freedom Index Funds invest entirely in passively managed underlying funds.
- Fidelity Freedom Blend Funds invest in a mix of actively and passively managed funds.
As such, the Freedom Funds have the highest expense ratios, while the Freedom Index Funds have the lowest of the three types.
"Diversification is a core principle within Fidelity's target date strategies, providing a balance among exposures in the portfolios to help navigate the uncertainty of capital markets over long-term time periods," says Sarah O'Toole, institutional portfolio manager at Fidelity Investments.
Fidelity's target-date funds use a "through" glidepath, continuing to adjust the asset allocation after retirement to combat the risk of running out of assets in retirement, which the company believes to be the most significant risk to retirees.
"As investors approach and enter retirement, their ability to 'hedge' a potential income shortfall is reduced, because new or additional sources of income may not be available," O'Toole says. Fidelity's "through" glidepath "addresses the challenge of retirement investors' long time horizon by balancing the potential for short-term volatility with long-term retirement income objectives."
The Freedom Funds progress from a roughly 90% equity allocation early in the savings period to a 51% equity allocation at retirement, then continue to reduce equity exposure for approximately 18 years in retirement, finally settling at 19% equities.
John Hancock stands out in that it offers both "to" and "through" target date series.
Its Multimanager Lifetime Portfolios – its only portfolios available outside of company retirement plans – and Multi-Index Lifetime Portfolios follow a "through" glidepath that begins at 95% equity, tapers to 50% at retirement then stabilizes at 25% equity through retirement. This makes the funds more aggressive than average in the early years and more conservative than average in later retirement.
Both of the above funds "aim to maximize pre-retirement wealth accumulation while minimizing post-retirement longevity risk," says Phil Fontana, Head of Investment Product U.S., John Hancock Investment Management. The Multimanager Lifetime Portfolios are actively managed while the Multi-Index Lifetime Portfolios "use ETFs and low-cost active allocation strategy to minimize the impact of expenses on portfolio returns."
The third suite of target-date funds, called Multi-Index Preservation Portfolios, "are designed for participants who want to minimize their risk of loss as they near retirement and expect to withdraw and reallocate their 401k assets to generate income in retirement," Fontana says. As such, they use a "to" glidepath that is the most conservative glidepath on this list. It begins at 82% equities then flatlines at only 8% equities at retirement. Like the Multi-Index Portfolios, these use exchange-traded funds and low-cost active allocations.
"The funds use an open architecture structure and are comprised of both proprietary and third-party funds," Fontana says. "Proprietary funds undergo the same scrutiny and due diligence process as non-proprietary funds."
The multi-manager approach includes more than 20 portfolio management teams, so they provide diversification not only in the assets they hold, but also the style of management used within the funds.
JPMorgan Asset Management
JPMorgan Asset Management's suite of SmartRetirement target-date funds, which allocate 85% to equities in the early accumulation years and 32.5% equities at and in retirement, are among the most diversified in their risk profile at retirement in the industry.
Lynn Avitabile, investment specialist, Multi-Asset Solutions at JPMorgan Asset Management, says the choice to balance risk between equities and fixed income, including credit, is due to a couple reasons.
First, investors "do not want to risk having high price volatility in the years before they want to use the money." That's a wise concern given that a sharp drop in your retirement assets in the year prior to retirement could materially impact your lifestyle in retirement.
The second reason for the diversified approach is that as investors enter retirement, their probability of uneven cash flows increases as they purchase retirement homes, begin estate gifting and pre-pay assisted living facilities. "From an investment perspective, as participants approach this life stage, there is simply not enough time left to overcome negative events," Avitabile says.
The funds also de-risk faster in the years before retirement than some other funds. "In the critical near-retirement years account balances peak, and so do the potential dollar losses associated with a market downturn," Avitabile says.
JPMorgan offers two SmartRetirement lines: The traditional line, which is fully actively managed, and Blend, which uses "index strategies in asset classes perceived to be more efficient – such as U.S. equity and developed International equities – with active management in asset classes that are less easily or efficiently indexed," Avitabile says.
JPMorgan's Blend series and the aforementioned BlackRock LifePath Index series are the only two target-date fund series with a Gold Morningstar rating as of this writing.
Through partnerships with other target-date fund providers, MassMutual has built the largest target-date offering on this list. It includes five-target date series that are only available through workplace retirement plans.
- The MassMutual RetireSmart by JPMorgan funds are "a multi-manager target date suite focused on helping plan participants reach their financial goals," says Doug Steele, head of investment management, MassMutual Funds. These funds provide "broad diversification across multiple managers, asset classes and markets." They use a "to" glidepath that moves from 91% equity to 33% equity at and through retirement.
- The MassMutual Select T. Rowe Price funds use T. Rowe Price's active management and provide "a tactical allocation process that strives to enhance returns and help mitigate risk," Steele says. With a "through" glidepath, these funds continue to de-risk throughout an investor's life. The glidepath goes from 98% equities to 55% equities at retirement, then settles at 30% equity about 30 years into retirement.
- The IndexSelect series is a low-cost, passively managed series that provides multiple "to" glidepaths based on your risk tolerance. All three versions start at 99% equities, but the Aggressive version ends at 50% equities, the Moderate at 40% equities and the Conservative at 30% equities.
- The Wilmington Trust American Funds offer "a glide path that balances market risk and longevity risk by shifting to higher-yielding lower volatility securities as the participant ages," Steele says. "The use of flexible mandates, like global and multi-asset funds, that enables bottom-up asset allocation tilts with the goal to enhance returns and help mitigate risk." These funds go from 85% equity to 45% equity at retirement, finally settling at 28% equity.
- The Legg Mason Total Advantage funds "seek outperformance potential and risk mitigation through active investment management blended with lower-cost passive solutions," Steele says. The funds leverage the expertise of 16 different asset managers to provide a managed volatility approach and underlying stable value asset class. The glidepath goes from 97% equity to 53% at retirement to 34% about 15 years into retirement.
Nuveen, the investment manager of TIAA, offers three target-date series: Lifecycle Active, Lifecycle Index and Lifecycle Blend. All three varieties "use the same glidepath construction methodology and are managed by the same long-tenured portfolio management team," says Brendan McCarthy, national sales director of DCIO (defined contribution investment only) at Nuveen. The Blend suite is only available in qualified retirement plans.
The difference is in the underlying assets used to follow those glidepaths.
The Lifecycle Active suite uses actively managed underlying funds, the Index suite uses passively managed index funds, and the Blend suite uses a combination of both. The expense ratios vary based on the level of actively managed funds used – for the most part, the more active the management, the higher the expenses.
"Our Active and Blend series are unique in the industry because they invest in direct commercial real estate, which provides important diversification benefits given its historically low correlation to equities and fixed income," McCarthy says. "In addition, commercial real estate has the potential to reduce overall portfolio volatility and provide a hedge against inflation." Real estate is included in the Lifecycle Active and Blend funds, which maintain a 5% real estate exposure from inception to the retirement target date.
All of the Lifecycle funds use a "through" glidepath that starts at 95% equity. The Index suite reduces equity exposure to 50% at retirement, while the Active and Blend funds taper down to 45% equities, 50% fixed income and 5% real estate. All three fund series land at 20% equities and 80% fixed income about 30 years into retirement.
State Street's Target Retirement series, available to certain U.S. workplace retirement plan investors, uses a diverse range of underlying investment vehicles, including real estate investment trusts (REITs) and commodities, to help control for key retirement risks such as inflation.
The glidepath starts with an industry-average 90% allocation to growth assets (namely U.S. and international equities). It then shifts to 47.5% growth assets, incorporating REITs and commodities, at retirement (age 65), before ultimately landing at 35% growth assets at age 70.
The funds reach their most conservative at age 70 to help address the IRS's required minimum distribution (RMD) rules that mandate retirees begin taking withdrawals from pre-tax retirement accounts at age 72.
Using index funds enables State Street to offer one of the lowest-cost target-date funds on this list. But the company recognizes that not all indices are created equal, says Brian Murtagh, vice president, DC Investment Strategy at State Street Global Advisors.
"Index construction can meaningfully impact how the exposure translates to risk and return for your participants, so we take an 'index aware' approach," he says. This includes an annual review of the underlying funds as well as the overall glidepath "to ensure (the fund) aligns with our long-term objectives for participants of each age cohort."
T. Rowe Price
T. Rowe Price has been managing target-date funds since 2002. Today, the investment management firm offers two different families of target-date funds: Retirement Funds and Target Funds.
Retirement Funds are "oriented around maximizing the potential for lifetime income," says Joe Martel, portfolio specialist, Target Date Strategies at T. Rowe Price. To combat the longevity risk that comes with living for 30-plus years in retirement, these funds take a higher-than-average stock allocation of 55% equities at retirement. The portfolios then continue to de-risk all the way to age 95, Martel says.
Target Funds, on the other hand, are more focused on reducing volatility in retirement and thus follow a more conservative glidepath. These are more for someone who is less concerned about maximizing their wealth or is willing to give up some of the ability of the portfolio to support withdrawals for very long years in retirement, Martel says. These are intended for, say, someone who expects a shorter retirement or has other assets – such as a pension – they can lean on for income.
Both of the T. Rowe Price target-date fund series begin and end at the same allocation, but the Target Funds start reducing stock exposure earlier so that they are more conservatively allocated at and into retirement.
That said, T. Rowe also is transitioning its funds to a higher equity allocation before and after retirement in response to research indicating investors need more growth to achieve long-term retirement goals. Over a two-year period starting April 2020, the allocations will increase to 98% equity from 90% equity at the start, finally settling at 30% equity instead of 20% equity at the end, making them some of the more equity-heavy target-date funds available on this list.
Both types of funds use T. Rowe Price's actively managed products as their underlying investments.
As the indexing pioneer, it's no surprise that Vanguard target-date funds use index funds to achieve their goals. "As a result, target-date investors receive access to thousands of U.S. and international stocks and bonds, including exposure to the major market sectors and segments at a cost that, on average, is 83% less than the industry average," says Martin Kleppe, head of Vanguard's index strategies team.
But while the funds are comprised of passive index funds, "Vanguard's portfolio managers take an active approach to ensure the Vanguard's target-date funds perform as expected for investors," Kleppe says. This allows portfolio managers to weigh "the tradeoffs between rebalancing with a high degree of precision against market impact and increased cost of trading," especially during market volatility.
Unlike some other firms that take a tactical approach to their glide paths, reacting to short-term market shifts and volatility, Vanguard "only makes highly strategic changes designed to improve diversification and product efficiency," Kleppe says. "Since the launch of the Vanguard Target Retirement series in 2003, we've made only four strategic changes." Those are:
- increasing equity and adding emerging markets exposure in 2006
- increasing international equity exposure and replacing the international equity index funds in 2010
- adjusting the international fixed income and short-term TIPS (Treasury Inflation-Protected Securities) allocation in 2013
- lowering cost and increasing international exposure in 2015
The funds use a "through" glidepath with a significant allocation to equities (90%) in the early savings years to capture the risk-reward premium before incrementally decreasing equity exposure to 50% at retirement. It dials down equity exposure to 30% by age 72, when investors must begin required minimum distributions (RMDs). (Previously, it was age 70.5.)