More target date “bubbles”

Posted by on March 2, 2011 @ 4:01 pm in Investing

In my February 4 post, I complained about what I perceived as mischaracterization of the performance of target date funds because of reporting that focused on the spectacularly poor results of a few small, unusual outlying target date funds (TDFs).

Well, last week a Government Accountability Office report on TDFs was released, and I’m starting to get a whiff of similarly slanted reporting on a different subject: accusations that these funds are charging “outrageous fees.”

So below I present another “bubble chart,” this time showing the net expense ratios levied by all TDF share classes tracked by Morningstar in the TDF and retirement income categories. As in my prior exercise on returns, each dot on this chart is sized in proportion to the total net assets in that share class, and the columns of dots are lined up by fund category.

Target date and retirement income fund prospectus net expense ratios, weighted by fund assets

Target date and retirement income fund prospectus net expense ratios, weighted by fund assets

Source: Morningstar. Includes all share classes of target date and retirement income mutual funds in the Morningstar database with 3-year returns as of February 28, 2010. Funds without a reported net asset value and a prospectus net expense ratio were excluded.

Once again, it feels like a picture is worth a thousand words: The data clearly show that the bulk of the assets currently invested in TDFs is in funds charging well under 1% in terms of net expense ratios. The trail of funds extending north of 1% pretty uniformly involves small, outlying funds.

You’ll also no doubt note there is one “outlier” at the bottom of this chart with the lowest expense ratio, and it’s a fairly big fund family. But I don’t want to make this about differences among specific firms.

My complaint is about generalizations that are attached to the entire TDF category. And my view, based on the data here and in the earlier post, is that this category of funds has, in general and on average, done a lot of good for a lot of people at a reasonable cost. While today’s chart data raise the question of why so many small providers exist that are charging high fees, clearly the whole category should not get tarred with a “high fees” tag any more than the “poor performance” tag.

Why does the category routinely get such negative press? My personal view is that TDFs are perceived as a threat by a variety of service providers and special interests. That this is an incentive to emphasize their problems should not be discounted.

Of course, the reality is that these funds should pose no threat to good financial advisors who have clients in specific circumstances that require a more customized investment portfolio or a different asset allocation than is available from these funds. Some investors are in need of exactly this kind of help, and recommending an appropriate portfolio is real work for which an advisor should be paid fairly.

Overall, low-cost TDFs could significantly raise the bar in terms of what investors get “out of the box” in terms of a basic, low-cost retirement portfolio adequate to help meet the needs of a large set of retirement savers.


•  All investments are subject to risk. Investments in target date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a target date fund is not guaranteed at any time, including on or after the target date.

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