Target-date funds are not only not created equal in terms of risk exposure, glidepath and performance but also in terms of fees, according to a recent report from Morningstar.
The very least expensive target-date funds, the Target Retirement series from Vanguard, charges a mere 19 basis points. At the high end of the spectrum are the Transition series from Oppenheimer, which charge 1.44%.
“That’s a huge disparity,” commented Josh Charlson, a senior analyst with Morningstar. Especially because target-date funds are popular defaults in 401(k) plans, and a choice an investor is likely to “set and forget” even if they make the choice themselves, investors need to track these expenses, Charlson recommends.
He calculates what an additional 50 basis points would cost a 25-year-old over 40 years. If that investor starts out with a $5,000 investment in a target-date fund, invests an additional $3,000 every year and earns an average of 6% a year, each additional half-percent in expenses would reduce that final portfolio by $70,000.
“You’d have to have some really exceptional performance or distinctive feature” to justify that higher cost, Charlson said. “For retail investors searching for a target-date fund, it probably makes sense to start with the lowest-cost funds on our list, then look for other characteristics you favor.”
For plan sponsors, he advises they also shop around for lower-cost target-date funds, or at least try and negotiate a lower cost with their plan administrator.