A good target date retirement fund should create a reasonably allocated fund for any investor and operate at a low cost, so as not to impede its investors' retirement plans. With that in mind, here are some excellent retirement date funds to grow your nest egg.
- Vanguard Target Retirement 2050 Fund (NASDAQMUTFUND:VFIFX)
- BlackRock LifePath Index 2050 (NASDAQMUTFUND:LIPAX)
- T. Rowe Price Retirement 2050 Fund (NASDAQMUTFUND:TRRMX)
I'll briefly explain the case for each fund company's offerings below.
Vanguard Target Retirement Funds
As a fund company, perhaps few are as dedicated to investor returns than Vanguard. It operates like a mutual company owned by its investors, resulting in extremely low fund fees.
What makes the Vanguard Target Retirement Funds so attractive is that they're extremely simple. Its target date funds (which range from 2020 to 2060 in five-year increments), invest in just four investment indexes:
- Total Stock Market
- Total International Stock Market
- Total Bond Market
- Total International Bond
In essence, if you own a Vanguard Target Retirement fund, you own the whole stock and bond market (save for the smallest and least liquid of stock and bonds) and with a very, very low fee. All of its target date funds, no matter how stock-heavy, carry an annual expense of less than 0.20% per year.
The chart below shows Vanguard's stock and bond allocations by the fund's target date. Note that Vanguard's allocations are almost consistently in the middle for the three fund companies in this article.
BlackRock LifePath Index 2050
Like the Vanguard funds above, BlackRock's LifePath funds use index funds to minimize their expenses and pass the bulk of returns to their investors. The LifePath funds manage their asset allocation by investing in BlackRock- and iShares-branded index funds, with the 2050 fund holding just seven funds all together.
Interestingly, BlackRock's funds start off the most aggressive, with its 2055 fund holding nearly 94% of its assets in stock. However, closer to retirement, BlackRock's funds are some of the most conservatively invested, holding less than half its assets in stock vs. 58% and 61% of assets in stocks at Vanguard's and iShares' funds. Stock exposure ultimately falls to 40% in retirement, where it is maintained as its owners transition into retirement.
Investors can buy BlackRock's funds for as little as 0.40% for the A shares, but institutional share classes are substantially less expensive if available to you. The institutional shares (Class I) carry fees of just 0.10% annually, but they typically require a $5 million minimum investment (which can be waived for some retirement plans).
T. Rowe Price Target Retirement Funds
The only actively managed funds on this list, T. Rowe Price's funds appear here because for those closest to retirement, its funds may more suitable than other funds.
The glide path established by the company calls for a slow decline in stock assets until, and after, retirement. Stock holdings drop to 20% of the portfolio 30 years after its investors' retirement date has passed.
The chart below shows the stock allocations of its funds by retirement date.
Fund fees may be a hang-up for many people who would otherwise invest in T. Rowe's options. The company's 2050 fund carries a fairly heavy annual expense ratio of 0.75%, almost entirely because it invests in actively managed funds. It doesn't get much better with time, either, as its 2030 fund carries an expense ratio of 0.72% annually, fairly high for a fund dominated with bonds rather than stocks.
T. Rowe Price has an excellent reputation for performance as a fund company generally, but a higher fee presents a higher bar for outperformance going forward.