Best Target Date Funds
Methodology
Morningstar rates approximately 600 target date retirement funds, although it’s worth noting that this overall group includes funds in the same family with different target date years.
For the purposes of this list, we chose to compare funds with 2060 target dates from fund families that are highly rated by Morningstar and available for purchase by self-directed investors. Some target date funds are only available for purchase in 401(k) plans; we chose to exclude them from this assessment.
As funds of funds, target date funds own mutual funds, index funds and ETFs. They charge an expense ratio, and some also add additional management fees to their gross expense ratio. We screened for funds that offered the lowest possible fees.
With target date funds, investors should closely scrutinize fee structures before investing. Many funds excluded from this list charged additional distribution and service fees—so-called 12b-1 fees—or carried exorbitant expense ratios.
The final list was individually curated to include a balance of actively and passively managed options with a variety of asset allocations. The choices on our list of the best target date funds offer a good range of options suited to individual, self-directed investors.
To learn more about our rating and review methodology and editorial process, check out our guide on How Forbes Advisor Rates Investing Products.
What Is a Target Date Fund?
Target date funds provide retirement investors with a diversified mix of stocks and bonds that rebalance over time. Also known as lifecycle funds, target date funds gradually shift from more risky stocks to less risky bonds the closer you get to retirement.
Financial professionals encourage younger investors to own more stocks and take on more risk, since they have plenty of time to get additional growth during bull markets and recover from losses incurred during bear markets.
But as they get closer to retirement, investors are encouraged to shift towards less-risky fixed income assets. While bonds don’t benefit as much from growth and price appreciation, they offer better security for your principal and more predictable income.
How Do Target Date Funds Work?
Each target date fund comes with a specific target date—in this assessment, we chose funds targeted to 2060. That means each fund on our list aims to pivot from stocks towards bonds over the next forty years or so.
The strategy for this gradual shift is referred to as the fund’s “glide path.” The glide path is typically described as the gradual percentage change in the allocation of the fund’s portfolio to stocks and bonds.
A 2060 target date fund might be 90% invested in stocks and 10% in bonds today, with the ratio changing by approximately ten percentage points each decade or so—to 80% stocks and 20% bonds ten years from now, and so on.
There are “to” and “through” glide paths. With a “to” glide path, the allocation does not change once the fund reaches its designated target year.
For example, a 2020 target date fund’s allocation might remain fixed as the years march on to 2024, 2025 or even 2030. Meanwhile, a through glide path might keep shifting away from stocks after the target date passes
How Should You Choose a Target Date Fund?
There are a few things to keep in mind to help you choose the right target date fund:
- Target date. You should generally choose a fund whose date most closely aligns with the year you plan to retire or start using the money.
- Glide path. Even target date funds for the same year can have vastly different glide paths. Make sure you’re comfortable with a fund’s proposed glide path and methodology before you invest.
- Fees. As actively managed funds, target date funds can have above-average fees, and every dollar you pay in expenses is money that’s not going towards your retirement.
Disadvantages of Target Date Funds
Many target date funds have disadvantages like high fees and too great an allocation to conservative fixed income assets.
Even among the best target date funds, you can end up paying relatively high expense ratio fees. The steepest annual fee on our list is 0.65% a year, but some of the most expensive funds in the category can weigh in well above 1%. By way of comparison, the very best value ETFs carry expense ratios as low as 0.04%.
While the differences among these fees may seem trivial, they can still have an outsized impact on your retirement. A paper published by the U.S. Department of Labor found that a one percentage point difference in fees and expenses would reduce your account balance at retirement by 28%. That’s not a trivial amount.
An optimal asset allocation is another important consideration with target date funds. One common criticism of target date funds is that they become too bond heavy in the ten to fifteen years ahead of your target retirement date, potentially causing you to lose out on significant equity gains in the process—depending on market performance, of course.
Your final decade of working is when your portfolio is at its highest balance, and compound interest can really get to work for you. If you’re invested in a target date fund carrying 50% or more in bonds at that point, you’ll miss out on growth and have a less abundant retirement because of it.
Target Date Fund FAQs
What are the best target date funds?
We’ve reviewed dozens of target date funds to determine which target date funds are the best for retirement. While no fund is right for everyone, we believe the Fidelity, Vanguard, State Street, American Funds, TIAA-CREF and T. Rowe Price funds listed in this article are among the top tier of target date funds.
How can I estimate what my target date fund will be worth?
It’s nearly impossible to know what your target date fund will be worth in the future because no one can predict how the stock market will perform. Fund managers also have discretion over how often the fund is rebalanced, which will affect long-term returns.
A better question to ask is if you will have enough money to retire. To determine that, you can start with online retirement calculators such as the ones provided by Fidelity, Vanguard and Schwab, but should ultimately meet with a financial professional for a more thorough assessment.
How often do target date funds rebalance?
Target date funds do not specify how frequently they rebalance their allocations. Most prospectuses state that the fund may rebalance or modify the asset allocation “from time to time.”
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Disclosures
- [1]INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
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