We are living in an age where convenience, digital technology, and no-fuss, auto-pilot protocols often are preferred over laborious, detailed methods that might yield higher quality at a commensurately higher cost.. Appliances like pressure cookers, automatically activated security and lighting systems, and even Spotify playlists are compiled in cookie-cutter fashion. Add a small amount of tweaking, like entering some dates or times, and then the rest is done for us.
Retirement fund management for those seeking comparable convenience is trending towards a different kind of ETF or mutual fund. Called Target-Date Funds, or ETFs, their popularity has soared of late. Characterized as “set it and forget it” funds, Target-Date ETFs as an asset class hit $3.5 trillion in assets under management at the end of 2023. These can be ideal for retirees who want a “hands-off” approach toward retirement fund management or for companies that have a pension plan and need criteria to be customized for its employees.
However, despite all of the major funds offering their own versions, Target-Date ETFs are not all made equal, so some research to determine the most suitable for one’s retirement requirements is advisable.
What is a Target-Date ETF?
Target Date funds hit $3.5 trillion AUM in 2023.
Target-date funds are sometimes called life-cycle funds or target-retirement funds. Mechanically, the fund’s portfolio rebalances its mix of stocks, bonds and cash depending on your age. Earlier in the Target-Date ETF life cycle, the portfolio carries more growth oriented investments, such as stock funds, perhaps as much as an 80/20 ratio to bond funds. As one ages, the fund shifts the ratio to start decreasing growth and increasing income.
The rate at which the ratio shifts from heavily weighted in riskier equity funds towards safer fixed income funds is called the glide path. This is one of the few variables that separates Target-Date ETFs. Some funds start at as much as a 90/10 stocks/bonds ratio and by retirement age, wind up at 30/70, for example. Other variables from providers include a range of strategies and mixes within the glide path. Management philosophies on glide paths and choice of assets differ between Target-Date ETFs, so prospective investors should research among the choices available for the ETF strategies they most closely identify with.
In addition to the target date of retirement, one must decide whether they wish their retirement funds to be in a “to” or a “through” ETF. In the “to” version, the glide path locks up the asset allocation in the designated retirement year. “Through” ETFs, on the other hand, will extend the glide path 10, 15, or even 20 years past the retirement date. The longer glide path will add the extended time to the equation in order to stretch income to last commensurately.
Investing in Target-Date ETFs
If Target-Date ETFs sound appealing, there are several ways to obtain them. Bear in mind that some of them have minimum investments, comparable to mutual funds. :
- It’s possible that the 401-K set up by an employer is already defaulting towards Target-Date ETFs, especially if the company’s pension plan is already geared towards them.
- One can choose to invest in a Target-Date ETF for a personal IRA or Roth IRA brokerage account or privately managed 401-K.
- A direct purchase can be made, comparable to purchasing mutual funds, directly from the management sponsor, such as BlackRock’s iShares, Vanguard, Fidelity, and others.
Selecting a Target-Date ETF
Prospective Target-Date fund investors just need to determine their date of retirement, whether they want investing to stop or continue for a specified period past the retirement date, and their risk tolerance. The Target-Date Fund managers do the rest.
Target-date ETFs do not necessarily have to be an all-or-none affair. One can combine them as part of a broader strategy. For example:
- A Target-Date ETF can be assigned for a longer glide path on an IRA or 401-K that is not expected to be tapped until RMD is triggered, while ROTH IRAs or 401-Ks, which have already paid their taxes, can be more aggressively managed. The ROTH accounts can contain high growth, high dividend REIT or BDC stocks, commodity funds or stocks, and international funds, while the Target-Date ETFs will migrate towards steadier fixed income over time.
- Target-date ETFs can be used as a “safe” risk mitigation allocation if the owner of the account has a higher risk tolerance and is often tempted to “trade” in the retirement account.
- Having several Target-Date ETFs with staggered “to” glide paths can be used if liquidity requirement events are projected into the future, such as specific travel plans, real estate purchases, or other kinds of scenarios. This allows for the funds remaining in the retirement accounts to continue growing, undisturbed.
- Some Target-Date ETF offerings include an annuity component to better aid in spending management in one’s retirement years.
Some Well Regarded Target-Date ETF Examples
American Funds
Capital Group’s American Funds series of target-date funds’ dates currently go out as far as 2065. They earn top ratings from Morningstar, and their long-term results have been among the highest and most consistent among its peers. American Funds’ expense ratios are on the lower end (average 0.39%) for actively managed funds. Their balance between US and international equities, and sub-asset-class positioning was highlighted as impressive by Morningstar.
T. Rowe Price Retirement
Among Target-Date funds and ETFs, T. Rowe Price Retirement series manages to thread the needle between maintaining a relatively low volatility while sporting one the more aggressive glide paths. Its 2065 series starts at 97/3 stock/bond ratio and 40/60 ratio for its 2005 fund. Its team of 3 managers continually tweaks the asset mix to maximize gains and minimize volatility, with an additional 2 funds added in 2023 to further calm volatility in the near and post-retirement years. Expense ratios are 0.59%
Fidelity Freedom Index
Fidelity is a trusted and well-known name in the mutual fund arena. Its Fidelity Freedom Index Target-date fund sports some very low expense ratios with some classes at 0.06%. The Freedom series has one of the smallest cast positions at glide path commencement, with a sizably aggressive stock/bond ratio (90/10 for the 2065 series). However, above-average inclusion of international stocks has caused the Fidelity Freedom Index fund to underperform against its rivals over the past 3 years.
Blackrock Lifepath Index
As Blackrock is the largest asset manager on the planet, it would naturally have a presence in the Target-Date ETF and fund world. Its Lifepath Index has a very aggressive glide path as high as 99/1 stock/bond ratio at the beginning, with a 40/60 ratio by the target year. The average expense ratio is 0.09%.
As one might expect, the Target-Date fund portfolios consist predominantly of Blackrock iShare funds. The management team is not averse to changing index benchmarks to better fit targeted exposures, credit risks, and other criteria on the bond side. This is to address the tail end of their glide paths, which have tended to lag against peers as the bond ratio side increased. Additionally, there is a small amount of underperformance in some middle target date series, such as 2030. This is due to overweighting of iShares MSCI Total International Stock ETF, which has lagged the US market equivalents.
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