The Best Target Date Funds for Retirement Savers

Fidelity Freedom

Average expense ratio: 0.65%

Stock/bond mix at retirement age: 55% stock, 45% bond

We had been wary of this target-date series in recent years, because it had been underperforming and the series was in the midst of a revamp. But reconstruction ended in 2015, for the most part. And so far, we like what we see.

There were three key upgrades: First, the firm added some of its star stock fund managers to the lineup, including Will Danoff, of Fidelity Contrafund, Joel Tillinghast of Fidelity Low-Priced Stock, and Steve Wymer of Fidelity Growth Company. They each manage a portfolio exclusively for the target-date funds following strategies similar to the ones they run for their better-known funds. Second, the Freedom funds got a boost in stock exposure across all funds. Now, most of the funds have a stock allocation that matches or exceeds the industry norm. Finally, Freedom managers can make tactical changes depending on their one- to five-year view of stock and bond markets, with the leeway to shift assets by as much as 10 percentage points from target allocations.

The overall result so far is good. Performance has improved. After lagging most of its peers, many Freedom funds posted chart-topping returns for their category in 2015 and in 2016, and most ranked among the top third of their category. The improved returns came with some added volatility, but as measured by standard deviation, nothing wildly out of line with category averages. The price is reasonable, too. Freedom funds have an average expense ratio of 0.65%, below the typical 0.71% for all target-date fund series.

The Freedom funds have appeal for investors with an aggressive bent. The series begins for investors with a 45-year horizon with a 90% allotment to stocks—and stays there for the next two decades. That’s decidedly more aggressive than the typical target-date glide path, which begins to ratchet down its exposure to stocks after the first 10 years. For most of the ride thereafter, the Freedom stocks continue to hold more stocks than their typical peers. At retirement, the 55% stock allocation is 13 percentage points above the typical target-date fund. The glide path continues to adjust for 15 years after retirement and ends with a 24% stock, 76% bond portfolio.

Fidelity also has a Freedom Index series of target-date funds. We expected those portfolios to shine, given how well index funds have fared over actively managed portfolios in recent years. But on almost every measure we scrutinized—return for the risk, long-term performance, consistency of year-to-year performance and results in rising and falling markets, for example—the Freedom Index series lagged the actively managed Freedom series. That may be a “win” for active managers in the ongoing debate about active versus passive investing.

T. Rowe Price Retirement

• Average expense ratio: 0.76%
• Stock/bond mix at retirement age: 55% stock/45% bond

A mix of 18 T. Rowe Price funds fill the Retirement portfolios. Some are top-notch, small- and midsize-company funds that are otherwise closed to new investors, including T. Rowe Price New Horizons and T. Rowe Price Mid-Cap Growth. Each month, a dozen experts meet to assess how Retirement fund assets overall are divvied up among U.S. stocks, foreign stocks, bonds and other assets. A small tweak to the fund series is made every month, says Wyatt Lee, who comanages the series with Jerome Clark. This year, the committee decided to lower the series’ stock exposure by 1.5 percentage points across the board, and to trim the funds’ holdings in high-yield debt and emerging-markets bonds.

With a surging bull market over the past eight years, T. Rowe’s Retirement target-date fund series has benefitted from its aggressive stock apportion. These funds keep roughly 10 percentage points more in stocks than their respective peers, says Morningstar analyst Leo Acheson. It shows in its chart-topping fund performances. But the trade-off has been above-average volatility.

Managers are willing to live with the volatility to meet a key goal of this target-date series: longevity. The fund’s managers don’t want you to outlive your savings. To make your money last, more exposure to stocks is required, says Lee. And that comes with greater portfolio volatility. The Retirement funds’ glide path continues to shift for 30 years past its retirement target year, ending with a 20% stock, 80% bond portfolio.

Where this series falls a tad short is in its fees. The typical expense ratio of 0.76% is just a hair above average for target-date funds.

• The firm launched another target-date series four years ago, T. Rowe Price Target, that is worth a look. Its glide path starts with the same stock/bond mix as Retirement—90% stocks and 10% bonds with 60 years to save—but it takes a slightly more conservative route near and at retirement. The at-retirement stock/bond mix sits at 42.5% stocks, 57.5% bonds. Eventually, however, after incremental shifts for 30 years past retirement, the Target glide path ends with the same mix as the Retirement series of 80% bonds and 20% stocks. It’s a solid choice for investors willing to accept more modest growth in exchange for a less bumpy ride around their retirement date, says Lee. Funds in this series have expense ratios that range between 0.58% (for Target 2005) and 0.75% (for Target 2060).

Vanguard Target Retirement

• Average expense ratio: 0.13%
• Stock/bond mix at retirement age: 49% stocks; 51% bonds

Indexing fans will appreciate this series because it’s made up entirely of passively managed funds. Its simplicity is a draw, too. Just four funds comprise most of the portfolios in this series—two stock index funds and two bond index funds, all of them Vanguard funds, of course: Total Stock Market Index, Total International Stock Index, Total Bond Market II Index and Total International Bond Index. As a Vanguard Target Retirement fund moves to within five years of its target year, it takes on a fifth index fund, Short-Term Inflation Protected Securities Index.

Vanguard doesn’t tweak its glide path much. But in 2015, it increased the target-date portfolios’ allotment to foreign stocks and foreign bonds by 10 percentage points. (The overall stock-bond mix stayed the same.) After a nine-year bull market in U.S. stocks, and the end of a long run in U.S. bonds, the move seemed a wise choice—and in time, it may prove to be a brilliant one. But it was a key reason for the series’ lackluster performance in 2015. Every fund in the Vanguard series posted losses that year as foreign stocks floundered and dragged down the portfolios. The Vanguard target-date funds came roaring back, along with many foreign markets, in 2016. Nearly all of the funds posted returns among the top third of their peers or better.

This series’ glide path sticks close to the industry average, starting with a 90% stock and 10% bond portfolio 60 years to go before retirement. It ends seven years after the target year with a 30% stock, 70% bond mix. The 0.13% average expense ratio makes this series the lowest-cost around.