Author Topic: Target Retirement Date fund or Index fund?  (Read 7051 times)

ReluctantMillennial

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Target Retirement Date fund or Index fund?
« on: December 29, 2015, 12:51:26 PM »
Hi all -

I'm in the middle of making some changes to my 401(k).  When I started my career four years ago, I just picked the target retirement date that coincided with my (at the time) retirement age.  I've been throwing money into a 2050 target date fund for the last four years and have quite a bit of change built up in there.  I was just reviewing my contributions and clicked on the available funds.  One thing I do not care for:  the expense ratio is 0.46% on my current fund.  An option for me is a BlackRock US Equity Index Fund, with an expense ratio of 0.02%.  I know MMM is a fan of just plain old index funds, and the expense ratio seems right to me.  My instinct is to move my money into that fund and out of the 2050 target date.  Does anybody have any input about why I shouldn't do that?  I appreciate your help; these forums have some of the smartest folks on the internet.  Happy New Year to you all!
« Last Edit: December 29, 2015, 12:59:53 PM by ReluctantMillennial »

Frugalman19

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Re: Target Retirement Date fund or Index fund?
« Reply #1 on: December 29, 2015, 07:57:27 PM »
You would have a lot more responses from the investor alley forum. But I will take a shot at it. I don't care for target date funds, but you are getting a lot more diversification than just dumping all of your money into the us equity index. Is there any other index funds available? If it is just the target date fund and the us equity fund, I would stick with the target date fund simply for the added diversification. I think that the index funds are well liked here because of the low expense ratios and the fact that managed funds rarely outperform the index. But, when they talk about index funds, they are talking about broadly diversified index funds, like the vanguard total stock index.

Exflyboy

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Re: Target Retirement Date fund or Index fund?
« Reply #2 on: December 29, 2015, 08:45:09 PM »
0.46% adds up to a lot of money compared to 0.02% when you have a large portfolio so I tend to stick with my own mix of stock and bond ETF's

The problem of course is whats available to you within your plan.

Can you get a Bond ETF as well as the stock ETF?

GGNoob

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Re: Target Retirement Date fund or Index fund?
« Reply #3 on: December 30, 2015, 08:04:27 AM »
What other index funds are available? If none, I'd go 100% BlackRock US Equity Index Fund and hold your international and bonds in other investment accounts.

shadowmoss

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Re: Target Retirement Date fund or Index fund?
« Reply #4 on: December 30, 2015, 08:27:07 AM »
You could also just leave what is in the target fund there, and start putting new money into the  index fund, or move half of the money over to the index fund.  Doesn't have to be all or nothing either way.  Then, after awhile (to be defined by you) look at what has happened with both and make further adjustments.

ReluctantMillennial

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Re: Target Retirement Date fund or Index fund?
« Reply #5 on: December 30, 2015, 09:20:50 AM »
Thanks for the input, and for moving this to the appropriate forum.

There are a few other funds available, but all of them have higher expense ratios.  Apart from the target date funds, there are a few others that are specific to my company (it's a large enough one they can apparently set up their own funds and Fidelity goes with it):  A Non-US Equity Fund, a US Large Cap Equity Fund, a US Small/Mid Cap Equity Fund, a Fixed Income Fund, a Real Assets Fund, the BlackRock Fund I originally asked about, a BlackRock US Bond Index Fund, and a BlackRock Non-US Equity Fund.  The only other one with a similarly low expense ratio is the BlackRock Bond Index.

I guess I'm being a bit reactive, but the 2050 fund I'm in right now is down ~3% for the year because of its international holdings, and the US fund with BlackRock is up by ~3%.  I had assumed the Equity Fund (mapped to the Russell 1000 index) would keep me covered from a diversification perspective, but it does keep me out of international funds.

GGNoob

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Re: Target Retirement Date fund or Index fund?
« Reply #6 on: December 30, 2015, 09:33:51 AM »
Thanks for the input, and for moving this to the appropriate forum.

There are a few other funds available, but all of them have higher expense ratios.  Apart from the target date funds, there are a few others that are specific to my company (it's a large enough one they can apparently set up their own funds and Fidelity goes with it):  A Non-US Equity Fund, a US Large Cap Equity Fund, a US Small/Mid Cap Equity Fund, a Fixed Income Fund, a Real Assets Fund, the BlackRock Fund I originally asked about, a BlackRock US Bond Index Fund, and a BlackRock Non-US Equity Fund.  The only other one with a similarly low expense ratio is the BlackRock Bond Index.

I guess I'm being a bit reactive, but the 2050 fund I'm in right now is down ~3% for the year because of its international holdings, and the US fund with BlackRock is up by ~3%.  I had assumed the Equity Fund (mapped to the Russell 1000 index) would keep me covered from a diversification perspective, but it does keep me out of international funds.

I'd do the BlackRock S&P 500 and US Bond index fund in your 401k, then add international stocks in your taxable or IRA account. I'm unsure of your age, but you could do an overall allocation of like 55% S&P 500 index, 35% International index, and 10% Bond index.

Don't make investment decision based on current performance. Just pick an allocation of low cost index funds and stick with it. This is considered a three-fund portfolio and it's a portfolio that is hard to beat over the long term.

ReluctantMillennial

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Re: Target Retirement Date fund or Index fund?
« Reply #7 on: December 30, 2015, 09:37:32 AM »
I'm 29.  I have most of my money in the 401(k) but also have a taxable Vanguard account.  I could move the fund from the 2050 fund to like...70/30 US Equity Index and US Bond Index.  Then focus on international in my Vanguard account.

Or just leave things in the 2050 fund and move any new money into those others.  I'm just not sure I want to pay them 0.46% to manage the target fund that may  not even fit my situation anymore since I'm serious about ER.

NoStacheOhio

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Re: Target Retirement Date fund or Index fund?
« Reply #8 on: December 30, 2015, 09:45:09 AM »
Just figure out whatever allocation you're comfortable with, and mix the BlackRock funds accordingly.

MrFrugalChicago

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Re: Target Retirement Date fund or Index fund?
« Reply #9 on: December 30, 2015, 10:11:30 AM »
Target funds are not really that great. For someone with NO investment know how, its better than throwing money in a savings account.. but you can do much better with a few very simple purchases.. i.e. you can buy 1 index fund and 1 bond fund and get a similar product for much less fees..

charis

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Re: Target Retirement Date fund or Index fund?
« Reply #10 on: December 30, 2015, 10:31:54 AM »
Target funds are not really that great. For someone with NO investment know how, its better than throwing money in a savings account.. but you can do much better with a few very simple purchases.. i.e. you can buy 1 index fund and 1 bond fund and get a similar product for much less fees..

Interestingly, we have Vanguard Target funds for our IRAs  and 1 index fund and 1 bond fund in a 403b.  The expense ratio is basically .18% for the IRAs and the 403b.

Petunia 100

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Re: Target Retirement Date fund or Index fund?
« Reply #11 on: December 30, 2015, 12:46:28 PM »
Target funds are not really that great. For someone with NO investment know how, its better than throwing money in a savings account.. but you can do much better with a few very simple purchases.. i.e. you can buy 1 index fund and 1 bond fund and get a similar product for much less fees..

Assuming you have lower fee choices, which is a mighty big assumption.

MoonShadow

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Re: Target Retirement Date fund or Index fund?
« Reply #12 on: December 30, 2015, 12:52:23 PM »
Target funds are even worse than they appear, because they are a fund of other funds.  So they are required by regulations to disclose the expenses of the target fund itself, but not the expenses of the funds that it invests into in turn.  So the real expenses can be even higher.

That said, I'm not a big fan of Blackrock, either.  But you have to work with what you have.

MustacheAndaHalf

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Re: Target Retirement Date fund or Index fund?
« Reply #13 on: December 31, 2015, 02:07:31 AM »
What if you copied the approach used in Vanguard Target Retirement 2050 Fund?
54% Total US Stock Market Index
36% Total International Stock Index
07% Total Bond Market Index
03% Total International Bond Index
Meaning, buy a US index (54%), international index (36%) and a total bond market (10%).

There's other approaches, but that's Vanguard's for people retiring in 35 years.
« Last Edit: December 31, 2015, 02:09:32 AM by MustacheAndaHalf »

EZmoney

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Re: Target Retirement Date fund or Index fund?
« Reply #14 on: December 31, 2015, 01:46:51 PM »
Target funds are even worse than they appear, because they are a fund of other funds.  So they are required by regulations to disclose the expenses of the target fund itself, but not the expenses of the funds that it invests into in turn.  So the real expenses can be even higher.

First time poster here of limited investment experience (naturally somewhat Mustaschian, I've just been somewhat lazy about the optimal investment part). I'm just trying to flesh out my thoughts here...

So, assume:

 -you have $100,000 invested in a target retirement fund with an annual fee of .17 % ($170/year).

 -the target fund is composed of four funds, say at an average cost each of .10% annually each ($100 total cost/year).

 -Then on $100,000 invested in the target fund, you are in reality paying $270/year in fees.

 -Said in another way, you save $170/year doing it yourself (or copying their allocation).

Just considering. The $170/year you pay to have the experts manage your 100k might be worth it because 1) they keep abreast (hopefully in a correct way) of changing allocation decisions (i.e. recent increases in percentage of foreign stocks, why is that?) and 2) they rebalance automatically, saving you the effort and any fees/capital gains involved in buying/selling rebalancing. (How significant is the latter? I've never actually done this before, although I bought a mix of index funds about a year ago and have them in a taxable account).

It seems to me that up to about $100,000 invested, the $170 spent, relative to the annual costs of a person just plain being alive for a year, is a minor consideration (yeah, I know, every dollar counts, but I just like to think about other things).

 If a person had $500k invested ($850 saved doing it yourself), then suddenly you aren't talking chump change anymore.

To sum up, knowing myself, up to about $100,000 , I wouldn't worry about it too much. I'm just getting to the point now where I think it might be worth it for me to take a more active role in managing my own retirement accounts.

Comments?

 


GGNoob

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Re: Target Retirement Date fund or Index fund?
« Reply #15 on: December 31, 2015, 02:36:17 PM »
Target funds are even worse than they appear, because they are a fund of other funds.  So they are required by regulations to disclose the expenses of the target fund itself, but not the expenses of the funds that it invests into in turn.  So the real expenses can be even higher.

First time poster here of limited investment experience (naturally somewhat Mustaschian, I've just been somewhat lazy about the optimal investment part). I'm just trying to flesh out my thoughts here...

So, assume:

 -you have $100,000 invested in a target retirement fund with an annual fee of .17 % ($170/year).

 -the target fund is composed of four funds, say at an average cost each of .10% annually each ($100 total cost/year).

 -Then on $100,000 invested in the target fund, you are in reality paying $270/year in fees.

 -Said in another way, you save $170/year doing it yourself (or copying their allocation).

Just considering. The $170/year you pay to have the experts manage your 100k might be worth it because 1) they keep abreast (hopefully in a correct way) of changing allocation decisions (i.e. recent increases in percentage of foreign stocks, why is that?) and 2) they rebalance automatically, saving you the effort and any fees/capital gains involved in buying/selling rebalancing. (How significant is the latter? I've never actually done this before, although I bought a mix of index funds about a year ago and have them in a taxable account).

It seems to me that up to about $100,000 invested, the $170 spent, relative to the annual costs of a person just plain being alive for a year, is a minor consideration (yeah, I know, every dollar counts, but I just like to think about other things).

 If a person had $500k invested ($850 saved doing it yourself), then suddenly you aren't talking chump change anymore.

To sum up, knowing myself, up to about $100,000 , I wouldn't worry about it too much. I'm just getting to the point now where I think it might be worth it for me to take a more active role in managing my own retirement accounts.

Comments?

 

Thanks not true. You don't pay a fee for the TRD fund and the underlying fund fees. With Vanguard Target Retirement Date Funds (2060 for example), you basically pay just the average of the 4 underlying funds. The fee for VTTSX is 0.18%. When I looked at the underlying funds and averaged their fees based on the percentage of their holdings, I actually got 0.19% so the TRD Fund is actually 0.01% cheaper.

MDM

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Re: Target Retirement Date fund or Index fund?
« Reply #16 on: December 31, 2015, 03:28:33 PM »
Thanks not true. You don't pay a fee for the TRD fund and the underlying fund fees. With Vanguard Target Retirement Date Funds (2060 for example), you basically pay just the average of the 4 underlying funds. The fee for VTTSX is 0.18%. When I looked at the underlying funds and averaged their fees based on the percentage of their holdings, I actually got 0.19% so the TRD Fund is actually 0.01% cheaper.
+1

See http://forum.mrmoneymustache.com/investor-alley/wealthmentbetterfront-nail-in-the-coffin-article/msg740790/#msg740790 and other posts in that thread for similar discussion.

MoonShadow

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Re: Target Retirement Date fund or Index fund?
« Reply #17 on: December 31, 2015, 03:30:25 PM »

Just considering. The $170/year you pay to have the experts manage your 100k might be worth it because 1) they keep abreast (hopefully in a correct way) of changing allocation decisions (i.e. recent increases in percentage of foreign stocks, why is that?) and 2) they rebalance automatically, saving you the effort and any fees/capital gains involved in buying/selling rebalancing.

That's the sales pitch of a professional fund manager, and there is much merit to it.  However, statistical analysis of professional fund managers' historical performance tells us that, as a group, they don't outperform the total market as a whole.  So while there are some great fund managers out there, an individual investor is no more likely to pick an above average one than a below average one.  This just moves the burden of personal involement from learning how to invest to learning how to research fund management teams.  So if you desire minimum involement, you are still better off going with an entirely automated allocation (such as index funds, or Betterment) then choosing a managed fund without any knowledge on how to do so, simply because the overhead is lower for a computer program than a human manager.

dandarc

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Re: Target Retirement Date fund or Index fund?
« Reply #18 on: December 31, 2015, 03:32:51 PM »
Thanks not true. You don't pay a fee for the TRD fund and the underlying fund fees. With Vanguard Target Retirement Date Funds (2060 for example), you basically pay just the average of the 4 underlying funds. The fee for VTTSX is 0.18%. When I looked at the underlying funds and averaged their fees based on the percentage of their holdings, I actually got 0.19% so the TRD Fund is actually 0.01% cheaper.
Yeah - the way you can save by doing it yourself at Vanguard is because if you have enough $$$ you can get Admiral shares in some or all of your funds whereas the TRD funds are using Investor shares for all funds.

Not because they are tacking an additional fee on for the TRD funds.

MoonShadow

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Re: Target Retirement Date fund or Index fund?
« Reply #19 on: December 31, 2015, 03:34:19 PM »
So, are you guys saying that Vanguard's target date funds do include the fees of the underlying funds?

dandarc

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Re: Target Retirement Date fund or Index fund?
« Reply #20 on: December 31, 2015, 03:35:15 PM »
So, are you guys saying that Vanguard's target date funds do include the fees of the underlying funds?
Yes.  As do most other TRD funds, I'm sure.

dandarc

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Re: Target Retirement Date fund or Index fund?
« Reply #21 on: December 31, 2015, 03:44:20 PM »

https://www.vanguard.com/pub/Pdf/p308.pdf


Just look at the fee break-down on page 13 (first page after table of contents).  Only one line with any value - "Acquired Fund Fees and Expenses".  So they're not adding any management, 12b-1 or other expenses on top of the fees from the underlying funds.

MDM

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Re: Target Retirement Date fund or Index fund?
« Reply #22 on: December 31, 2015, 03:45:03 PM »
So, are you guys saying that Vanguard's target date funds do include the fees of the underlying funds?
Yes.  The link a few posts earlier goes into more detail, but in short
 - Vanguard's TD funds charge you the weighted average of the investor class shares of the underlying funds
 - If you have enough money, and want to take the time, you can do slightly better by using admiral class shares.

gReed Smith

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Re: Target Retirement Date fund or Index fund?
« Reply #23 on: December 31, 2015, 03:51:25 PM »
Remember that a target date fund is a fund of funds.  So you need to look at the underlying funds to determine if it is a worthwhile investment.  Vanguard's target date funds are total US equity, total non-US Equity, total bond and total non-us bond in different proportions depending on how close you are to the target date.  A lot of other investment companies put in other funds like commodities and gold that I don't like as an investment for the average person.

Odds are that the blackrock us equity and blackrock us bond are the best funds in OP's 401k and offer sufficient diversification. You don't need 8 funds to have diversity.  Lastly, I don't think international stocks are necessary, but don't discount them because of one down year.


EZmoney

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Re: Target Retirement Date fund or Index fund?
« Reply #24 on: December 31, 2015, 09:00:44 PM »
So, are you guys saying that Vanguard's target date funds do include the fees of the underlying funds?
Yes.  The link a few posts earlier goes into more detail, but in short
 - Vanguard's TD funds charge you the weighted average of the investor class shares of the underlying funds
 - If you have enough money, and want to take the time, you can do slightly better by using admiral class shares.

Thank you (and everybody else for your input). I guess that the other advantages of doing it yourself (assembling your own portfolio of index funds) would mainly be tax harvesting (in a taxable account) and the ability to allocate index funds between your taxable accounts and tax-advantaged accounts (in order to allocate your total portfolio to your best advantage).

Again, I'm just fleshing out my thinking here (because I put off the critical thinking for so long).

That said, my critical thinking has declined with the last two glasses of wine. Happy New Years everyone!

joninnyc

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Re: Target Retirement Date fund or Index fund?
« Reply #25 on: January 03, 2016, 07:17:32 PM »
One other thing to keep in mind is how your asset allocation philosophy will change over time vs how that of whoever's managing the target date fund is. What if the 2050 retirement fund changes its mind in 10 years and decides that by 2050 it will have 90% stocks and 10% bonds... will you notice that change? Do you read the prospectus? If you don't notice that change, you could be very surprised... whereas if you're managing yourself, you'd obviously know exactly what was going on at all times.