Target-Date Fund Expense Fees Vary Wildly

Morningstar analysis finds seven-fold variance of expense charges among mutual fund companies.

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There is an enormous range of fees among the mutual fund companies that offer target date funds, according to a Morningstar analysis. The lowest-expense funds—Vanguard's Target Retirement series—levy an expense charge of only .19 percent of assets. At the other end of the spectrum sits the Oppenheimer Transition series of funds, which has expenses of 1.44 percent. "That's a huge disparity," Morningtsar senior analyst Josh Charlson writes in an accompanying article.

[See Target-Date Funds Finally Showing Solid Gains.] Target date funds are keyed to investors' planned retirement ages. Over time, they automatically adjust their mix of stocks, bonds and other holdings to create a risk profile, or glide path, appropriate to an investor's changing age. The funds have become increasingly popular default options in many employers' 401(k) plans. But precisely because they are viewed as "buy and forget" holdings, it's important that investors be aware of the expenses charges of their fund. Higher expenses can eat away substantial portions of a fund's investment gains. Charlson uses an example of a 25 year-old who puts $5,000 in a target fund and invests $3,000 more each year. If the fund returns a compounded annual return of 6 percent over 40 years, the resulting nest egg would be nearly $70,000 less for each half-percent in expenses charged by the fund.

"You’d have to have some really exceptional performance or distinctive feature" in the more expensive fund families to justify their higher costs, he says in a separate interview. More expensive funds, for example, likely are actively managed and may achieve higher returns; many of the cheaper funds are passively managed and seek to equal returns on market indexes or other pre-selected baskets of investments. Morningstar will release additional target fund information next month that will permit "apples to apples" comparisons of these fees with their funds' investment returns. Such comparisons are difficult, Charlson says. Fund companies may offer several classes of target date products through different retirement programs and distribution channels. Morningstar selected the lowest expense fund classes from specific series of target date funds, so long as the classes it selected represented at least 10 percent of the assets of the entire series.

[See also 4 Myths About Target-Date Funds.] "For retail investors searching for a target-date fund," he writes, "it probably makes sense to start with the lowest-cost funds on our list, then look for other characteristics you favor." If you're in an employer plan and stuck with a high-cost choice, he advises, then at least squawk about the fees to your plan administrator, or suggest the plan add lower-fee choices.

Here are the expense ratios for the 34 fund families that Morningstar included in its review:

  • Vanguard Target Retirement Series; 0.19 percent.
  • Nationwide Target Destination Series; 0.65 percent.
  • American Century LIVESTRONG Series; 0.67 percent.
  • Wells Fargo Advantage DJ Target Date Series; 0.67 percent.
  • American Independence NestEgg Series; 0.68 percent.
  • T. Rowe Price Retirement Series; 0.69 percent.
  • TIAA-CREF Lifecycle Series; 0.69 percent.
  • Fidelity Freedom Series; 0.69 percent.
  • Schwab Target Series; 0.71 percent.
  • American Funds Trgt Date Rtrmt Series; 0.71 percent.
  • JPMorgan SmartRetirement Series; 0.79 percent.
  • Columbia Retirement Portfolios; 0.82 percent.
  • Goldman Sachs Retirement Str Series; 0.83 percent.
  • RiverSource Retirement Plus Series; 0.85 percent.
  • Barclays Global Inv LifePath Series; 0.85 percent.
  • DWS LifeCompass Series; 0.87 percent.
  • Principal LifeTime Series; 0.88 percent.
  • MassMutual Destination Series; 0.88 percent.
  • AllianceBernstein Retirement Str Series; 0.92 percent.
  • John Hancock Lifecycle Series; 0.93 percent.
  • Putnam RetirementReady Series; 0.94 percent.
  • Fidelity Advisor Freedom Series; 0.97 percent.
  • Vantagepoint Milestone Series; 1.02 percent.
  • State Farm Lifepath Series; 1.04 percent.
  • MainStay Retirement Series; 1.04 percent.
  • AIM Independence Series; 1.06 percent.
  • ING Solution Series; 1.07 percent.
  • Guidestone Funds MyDestination Series; 1.10 percent.
  • MFS Lifetime Series; 1.13 percent.
  • Payden/Wilshire Target Date Series; 1.15 percent.
  • Seligman TargetHorizon ETF Series; 1.20 percent.
  • BlackRock Lifecycle Prepared Series; 1.24 percent.
  • Franklin Templeton Retirem Series; 1.27 percent.
  • Oppenheimer Transition Series; 1.44 percent.