[Editor's Note: This is my favorite kind of guest post. If I could get enough posts like this I'd quit writing myself. I solicit these all the time, but rarely get them. This is written by a regular WCI reader, well-researched, and well-written. Joshua Lerner, MD, is an emergency physician and a blogger, although he blogs about his dog and photography rather than personal finance and investing. We have no financial relationship. Enjoy the post and leave a comment with your thoughts.]

I work for a small private physician group and when setting up my 401K I was faced with the choice of either attempting to construct my own portfolio from a list of two dozen mostly actively managed funds or choose a target retirement fund from the mutual fund company.  At her hospital, my wife was faced with the same options from a different fund company.  So what is a Target Retirement Fund and how do you compare one company’s funds against another?  Simply put a Target Retirement Fund is a fund of other mutual funds set on autopilot (from the employee’s perspective) to automatically rebalance and shift its holdings over time into and beyond retirement.  Every large mutual fund company has created this type of fund.  In reality, most companies actively manage their Target Retirement Funds.

I’m not here to necessarily discuss the merits of these plans.  White Coat Investor has already done that.  I’m here to talk about how one evaluates the differences between these plans.  Though they may specify the same target retirement date, how each company gets you to that date differs.  Differences in the relative amounts of stocks, bonds and cash mean differences in returns and risks.  Not all plans are created the same.

Glide Paths

To begin, we need to discuss the so-called glide path of a Target Retirement Fund.  While funds themselves admit they are subject to change or and may deviate from this path, the glide path is an illustration of the fund’s holdings as one approaches retirement and beyond.  Some companies are very upfront about their glide path.  Vanguard, for example, has a very simple slider on their website demonstrating the changes in the various holdings leading up until retirement.  They also should be commended for keeping the fund itself relatively simple with only a handful of total funds held.  Fidelity, T. Rowe Price, and Charles Schwab (the other companies I will review) provide a slightly more vague graph.

As these glide paths can be more vague, and unlike Vanguard, many of these other companies have literally dozens of holdings, making a comparison is difficult.  To compare Target Retirement Funds between different fund companies, I took a unique approach.  Based on my age, my Target Retirement Date Fund is 2045 (though I hope to retire sooner).  Working backwards, if I were ten years older, my Target Retirement Fund would be 2035.  The holdings in this fund should be similar to what the holdings in the 2045 fund are ten years from now.  Similarly, if I were 10 years from retirement, the holdings should be similar to what the current 2025 fund has as people with the 2025 fund are approximately 10 years from retirement now.  The 2015 fund is therefore representative of the holdings at retirement and the 2010 fund is representative of 5 years post retirement.  Instead of looking at what each company claims to do in the future, I looked at what they currently are doing now for other individuals closer to or at retirement.  As I said before, not all companies have a similar view or strategy.

All data is based on Morningstar.com’s profile of each plan as of 9/23/14.

LernerTableI’ve simplified this into a graph showing how each company’s funds “glide” into retirement:


Looking first at stock holdings (blue on the graph), all four companies start very similarly with total stock holdings between 87% and 89%.  The ratio of domestic stock to international stock also has little variability with Schwab holding 5% more domestic stock than any other company.  Beginning with the “ten years forward” however, significant variations begin to occur.  Fidelity does not change its stock holdings at all while the other plans drop 4% to 9% causing a gap of up to 7% in amount of stock holdings between Fidelity and Schwab.

As one approaches retirement, the gap between holdings narrows.  10 years before retirement, the variability is only 5% with Schwab still the most conservative with 66% stock holdings and T. Rowe price the most aggressive with about 72% (Fidelity has 71%)

Retirement is obviously a crucial time as this represents the point at which the fund must switch from a goal of accumulation to a goal of preservation.  It is interesting that the variability at retirement is therefore so broad between the companies and perhaps provides insight into how each company plans to manage itself in retirement.  Charles Schwab continues to stay conservative, dropping its stock holdings to 43% while every other company stays at or above 50%.  T. Rowe Price stays the most aggressive holding 56% stock at retirement.

Beyond retirement, T. Rowe Price takes a large nosedive, shrinking its stock holdings to 37%, on par with Vanguard and Schwab.  Fidelity, on the other hand, maintains nearly 50% stock holdings 5 years beyond retirement.


Similar to stocks, bonds (green on the graph) all start off around the same in terms of total holdings among the different companies – between 7% and 9%.  Schwab and Vanguard however, quickly shift more holdings to bonds than the other companies with 30% bond holdings ten years before retirement and then more than 40% at retirement and more than 50% after retirement.  Fidelity consistently holds the fewest bonds as it clearly seeks to derive growth and preservation from its stock holdings.


Fidelity diverges from the other companies in terms of its cash holdings (yellow on the graph) at retirement, perhaps to hedge against its otherwise larger stock amount.  At retirement Fidelity holds 9.5% of its fund in cash, upping itself to nearly 12% beyond retirement.  No other company holds even 6% cash at retirement and only Schwab hits 6.3% beyond retirement.  Vanguard consistently holds the least amount of cash through its glide path with T. Rowe Price with the second least.


Each company takes a different view of how investors should manage their assets into and beyond retirement.  Based on the larger stock holdings coupled with larger cash holdings, it appears that Fidelity plans to use cash as a buffer against a down stock market through retirement while the other three companies rely more heavily on bonds as a buffer against a bear stock market.  Vanguard and T. Rowe Price are quite similar but Vanguard manages to build a fund with 4-5 holdings while T. Rowe Price has 19.  Some Fidelity funds have over 20 holdings, and the utility or benefit of a holding comprising less than 1% of the total fund is suspect.

Vanguard, especially in the years well before retirement, consistently keeps more of your money “in play” and out of cash reserves.  This may cause more marked fluctuations in both positive and negative returns but you probably don't want to pay a company to keep your money under a mattress anyway.  Why the other companies keep 3% of their funds in short term cash 20-30 years before retirement is beyond me.  It may have something to do with flexibility – allowing them to buy into other funds if they desire.

Not surprisingly, Vanguard wins hands down in terms of overall expense ratios (ER).  Vanguard ERs range from  0.16% to 0.18%.  The Fidelity ERs are four times higher, ranging from 0.61% to 0.78%.  T. Rowe Price (0.62%=0.76%) and Schwab (0.52% to 0.8%) are in a similar range. Just remember if you have $1,000,000 in your retirement account, a 0.5% difference in expense ratio adds up to $5,000 per year.

All in all, it is important to understand how your mutual fund company handles your target retirement date fund because you may find your own tolerance to volatility (in relation to stocks in particular) is different from that of the fund company who designed it.  Target retirement funds are marketed as a forget-about-it fund (Fidelity even calls them “Freedom Funds”) but before you leave it in the hands of someone else, it’s important to understand how they view the future and your retirement.  Like anything else, it’s always crucial to look under the hood and know just what you’re buying!

What do you think? Are Target Retirement Funds available in your retirement accounts? Do you use them? If so, which ones? If not, why not? Were you surprised to see such marked differences between the various mutual fund companies? Comment below!