More Statistics On 401(k) Target Date Retirement Funds

Just as theorized by a previously-mentioned academic paper about target funds, a new Bloomberg article talks about how some mutual fund providers like PIMCO and Invesco are now adding things like commodities futures, options, and currency swaps into these all-in-one funds. Will all these bells and whistles be worth the added cost? I doubt it, but differentiation is important in marketing. The article also included some interesting stats about these funds:

Investments in the [target date retirement] funds have swelled more than 380 percent since 2005 to about $343 billion as of September, according to the Investment Company Institute, a Washington- based trade group for the mutual-fund industry. [...]

The majority, or 53 percent, of plan sponsors that automatically enroll participants in 401(k)s use target-date funds as the default investment, according to a 2011 report by the Plan Sponsor Council of America, a Chicago-based trade group.

There are more than 40 target-date mutual fund families employers may choose from and some sellers also offer them in collective trusts or customized versions, said Jeremy Stempien, director of investments for the retirement solutions group at Morningstar Investment Management. “We can see tremendous discrepancy, tremendous differences among asset managers,” said Harvard’s Pozen, who’s also a senior fellow at the Brookings Institution. “I don’t think most people understand what they’re getting.”

Fidelity, Vanguard and T. Rowe Price Group Inc. controlled about 75 percent of the target-date assets in 2011, according to Morningstar. The average fee for a target-date mutual fund last year was about 1.1 percent, according to Morningstar, which included all share classes and retirement years such as the 2030 or 2040 funds.

Fees for the funds at Pimco and Invesco averaged about 1.2 percent. Vanguard, which mainly uses three broad-market index funds in its series, had the lowest expenses at about 19 basis points, or 84 percent less than the more expensive funds. A basis point is 0.01 percentage point.

Vanguard reported yesterday that in 2011 about 64 percent of new enrollees in 401(k) plans administered by the company invested solely in a target-date fund. The Valley Forge, Pennsylvania-based firm managed about $100 billion in the funds as of Feb. 29, according to spokeswoman Linda Wolohan.

I don’t invest in any of these funds, but I keep track of them because they are where the industry is heading. I have recommended Vanguard Target Retirement 20XX funds to family members, but have adjusted the “date” to match their own situations.

Comments

  1. I wish somebody analyzed the TSP target date options. I’m 100% invested in the FY2040 fund, for no other reason than quicken can’t auto-update the prices and I don’t want to manually insert more than one quote. In reality I know I should put all of my fixed income portion of my retirement funds in G, and then come up with a formula to balance out the rest of my portfolio (which includes a pretty large Roth account)… but it’s just too much damn work for a person who has a pathelogical need to know my networth on a minute to minute basis.

  2. @Dood: Not growing your net worth in order to watch your net worth more closely? Would sound insane if I couldn’t identify with that feeling…

  3. Target date funds are generic funds and are not suitable for all. For example if you want to retire early! which target fund do you chose?

  4. Well I think you made a bit of logical leap there Derek. All I was saying is that I invest in the FY2040 fund rather than individual TSP funds because TSP funds are a pain in the butt to track. If it was easier, or if I could get a more in depth analysis on TSP lifecycle performance, I might end up tinkering a bit, but to date, I haven’t seen that analysis (other than a bunch of people who are clearly lying on TSPtalk who claim they are “timing the market”)

    The only thing I know for sure is that TSP G is the best fixed income (cash) investment available(guaranteed minimum interest payments). I currently don’t have too much in cash yet as retirement is a ways off, but that will change over the years, and I often wonder if I should break up the ease of the TSP lifecycle option.

  5. The G Fund is a fantastic option if you have access to it. It pays the average rate of longer-term treasury bonds but re-adjusts rates every night. This is a very unique asset that is only available in this format. You get higher long-part-of-the-curve yields without having to lock in to those yields for the long-term. That is, if rates are to rise your yield will go up like a short-term investment but you don’t have to settle for the anemic yields on short-term bonds or cash. I highly suggest you utilize your access to the G Fund, it is an exceptional best of both worlds product that doesn’t exist outside of the TSP.

  6. how do you invest in a G-fund

    is that only available thru the Treasury like a savings bond?

  7. I’m not that familiar with Thrift Savings Plans options, I know that it is one of the retirement plan options for federal civil service workers as well as the military. I believe they have nice, low expenses and are basically index funds. I guess they don’t have ticker symbols?

  8. My understanding is that the TSP has S&P 500, Extended Market, EAFE index, Aggregate Bond Market, and the “G Fund”, as well as a bunch of target dates that combine said funds.

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