Do fees change over time on target date retirement funds?

[mustachianteacher]

I vaguely recall reading something somewhere about bond funds generally having slightly higher fees than equity funds. Or, maybe it was the other way around. In any case, since the allocation of a target retirement fund usually changes over time, does that mean that there's a chance the expense ratio would change over time?

Just curious, really. :-)

[mm31]

The expense ration of a target fund doesn't change over time, only their allocation

[fiveoclockshadow]

The ER of a fund can change at anytime and given the length of holding for a target date it wouldn't be surprising for it to change. Over time many index funds have seen declining ERs as competition reigns and fund management becomes more efficient.

As to the ER based on FI allocation I know that for T Rowe the closer date funds with higher FI allocations do in fact have higher ERs. I don't know if they would change the ER on a given fund as the date gets closer but they certainly could and it wouldn't surprise me if they did.

Vanguard on the other hand the ERs for different dates are nearly identical. Actually the ER on their 2050 is a smidge higher than 2020 (0.18 vs 0.16).  This is likely because the most expensive component for Vanguard isn't the bond fund but rather the international equity fund and the longer dates have more of that than the closer dates.

[ender]

The expense ration of a target fund doesn't change over time, only their allocation

Mine for my 401k went from 0.12% to 0.10% a while back, I was skeptical but it seems legit :)

[kyleaaa]

Yeah, they can change over time. Vanguard's certainly do.

[mm31]

The expense ration of a target fund doesn't change over time, only their allocation

That's most likely your 401(k) program's fault, passing the fees to you.

I've been w/ Vanguard for some time and their fees and expense ratios have never gone up, although technically they have changed (lower fees).

Mine for my 401k went from 0.12% to 0.10% a while back, I was skeptical but it seems legit :)

[neoptolemus412]

Target date funds are fund of funds.  This means they invest in other mutual funds.  In Vanguard's case, they invest in TIPs, Total Stock, Total Intl, and Total Bond funds.  The Target Date fund's expense ratio is based upon a composite of all of these underlying funds.  The reason you rarely will see a change in the expense ratio for the Target Date funds is because the size of the assets invested usually gives them the lowest expense ratio available.  However, from time to time the underlying funds will change their expense ratios.

[seattlecyclone]

One annoying thing about Vanguard's target date funds in particular is that they invest in the higher-fee "Investor" share class of the different funds. For example, their Target Retirement 2025 fund invests 48.7% in their Total Stock Market Index Fund, 24.3% in their Total Bond Market II Index Fund, 20.9% in the Total International Stock Index Fund, and 6.1% in the Total International Bond Index Fund, all Investor class shares. These funds have a weighted average expense ratio of 0.17%

For some reason you can't invest in the "Total Bond Market II" fund on your own. A quick comparison on Google Finance shows that the "regular" Total Bond Market fund pretty much stays in lockstep with the "II" fund price-wise.

Let's suppose we have enough money to buy the Admiral class shares of these same funds (substituting the different bond fund) and are willing to spend a few minutes rebalancing the investments each year to match the allocation of the Target Retirement fund. The difference in expense ratios is as follows:

Fund	Investor Expense Ratio	Admiral Expense Ratio
Total Stock Market	0.17%	0.05%
Total Bond Market	0.12% (for the II fund)	0.10%
Total International Stock	0.22%	0.16%
Total International Bond	0.23%	0.20%
Weighted Average	0.17%	0.09%

Turns out that rolling your own target date fund can potentially cut your fees almost in half.

[leonardotmnt]

@seattlecyclone: I read something recently on the Bogleheads site that might explain why they use the Investor ERs instead of Admiral for Vanguard.  I believe at least part of the rationale was that you're paying a slight premium for the rebalancing they do for you so you don't have to take the time to do it yourself. 

As far as the Total Bond Market II fund, apparently it's only used for the funds of funds to keep trading expenses down with the regular Total Bond Market fund.  http://www.bogleheads.org/forum/viewtopic.php?t=31586

[seattlecyclone]

@seattlecyclone: I read something recently on the Bogleheads site that might explain why they use the Investor ERs instead of Admiral for Vanguard.  I believe at least part of the rationale was that you're paying a slight premium for the rebalancing they do for you so you don't have to take the time to do it yourself.

This makes perfect sense. I don't fault Vanguard for trying to make a buck. The product they're putting out there is great for people who can't be bothered to decide on a good asset allocation for themselves and adjust it over time as they approach retirement. Even the investor shares have fees that are quite reasonable. I would bet the majority of Americans would be better off investing in these target date funds than whatever funds their high-priced investment advisor recommended.

That said, those of us on this forum tend to be a bit more frugal, price-conscious, and investment-savvy than the average American. The difference in fees (0.08%) between buying the target fund and buying the Admiral shares yourself adds up to $80/year per $100k of invested assets. This difference compounds over time. Rebalancing really isn't that hard. If I can spend an hour or two a year doing that to save $80 this year, and a bit more in each subsequent year as my assets grow, I'll gladly do that.

[mustachianteacher]

Thank you for all the responses! Since I was considering a Vanguard fund anyway, all the Vanguard info really helps. I've been saving and investing for 15 years and have never before considered a target date fund, but over the last 5 years or so, I haven't been that great about rebalancing and assessing whether my allocation still makes sense. The more I research, the more I realize how little I really know what I'm doing or why, so at this point, I'm thinking about sending future contributions to a target date fund. Because I don't plan on selling any of my current holdings, I realize my portfolio will always be skewed toward the other funds (mostly index funds), but that's OK. I'm trying to keep things simple without screwing it up too much.

[fiveoclockshadow]

I don't fault Vanguard for trying to make a buck.

At the risk of being pedantic, Vanguard doesn't really make a buck, rather the fund share holders themselves do - that's the unique structure of Vanguard.  In this case notionally the individual fund share holders are "making a buck" from the target date share holders.