Learn how to assess your TDF’s performance and know whether you are getting a good deal
Did your target date fund (TDF) perform well last year? If it returned 4%, how do you know if that is good? Millions of investors are faced with this question every year. How can you know if you are getting a good deal or if you are paying too much? If you are paying too much, how much is it costing you? Glidepath Financial is here to help. (P.S. – if your TDF returned 4% in 2024, you need to find a new TDF)
To understand whether a TDF costs too much, you first have to understand what a TDF is. A TDF is an investment vehicle that holds other assets, like stocks, bonds, or mutual funds. Most TDFs are structured as a fund-of-funds; the TDF itself is a mutual fund that holds other mutual funds. This structure is crucial as it gives us insight into what choices TDFs make (and how they should be evaluated). First, TDFs will choose which funds to hold. Almost exclusively, TDFs from a given company (like Vanguard, Fidelity, or BlackRock) hold mutual funds from that same company. So Vanguard TDFs hold Vanguard mutual funds, Fidelity TDFs hold Fidelity mutual funds, and so on. TDFs also decide how much to charge in fees. Importantly, TDFs themselves charge asset management fees (as a percentage of the assets you invest) AND the mutual funds the TDFs own also charge fees. While you won’t see the held mutual funds’ fees in TDF documents, their fees reduce the returns earned by the TDFs, lowering your returns and eating into your retirement nest egg.
Now that you understand that TDFs choose which funds to hold and how much to charge in fees, we can start talking about how to compare them. The short answer is that TDFs are inherently incomparable. First, TDFs from different companies hold different mutual funds, and it’s not always appropriate to compare mutual funds across companies. For example, you would not want to compare a Fidelity active growth fund with a Vanguard passive small cap fund. Second, TDFs hold mutual funds in different proportions. We call this the asset allocation. For example, one TDF may hold an asset allocation of 90% stock mutual funds and 10% bond mutual funds, while another TDF holds 80% stock mutual funds and 20% bond mutual funds. Differences in asset allocations further complicate comparisons. Third, fee structures differ across TDFs. On one hand, a Fidelity TDF may hold zero-fee mutual funds while having a high fee for the TDF itself. On the other hand, a Vanguard TDF may hold fee-charging mutual funds while charging zero fees itself. Fourth, TDFs follow glide paths which direct them how to adjust the asset allocation over time. The glide path directs how much of the portfolio should be held in stocks, and that proportion decreases as you approach retirement. How quickly that proportion decreases, and how other asset allocations change over time, vary dramatically across TDF companies.
So, how can we ever hope to understand how much a TDF costs? We rely on the academic expertise of our two founders and their extensive investment research. At Glidepath Financial, we benchmark each TDF to a low-cost version of itself. Put differently, we clone each TDF using low cost index funds. Each clone has the same asset allocation as the TDF, and each of the TDF’s holdings are mapped to the best fitting low cost index fund. By comparing each TDF’s performance to its clone’s performance, we can evaluate the TDF’s performance. If the TDF outperforms the clone, it is providing good value to its investors. If the TDF underperforms the clone, it could have done better by simply investing in low cost index funds.
So how is your TDF performing? Search for your TDF at the top of the page to find out how it has performed recently or use our calculator to find out how much it could cost you in retirement. If you are shopping for a TDF, pick out a top-performing TDF from our rankings based on when you plan to retire. Either way, take charge of your retirement!