We’ve added a new type of fund to our database: target date funds, which are very common as the default investment option in company retirement plans. If your 401(k) is invested in a fund with a date in the name, like the “Vanguard Target Retirement 2050 Fund”, you’re probably invested in a target date fund.
There are 12 target date fund series rated so far, from major asset managers like Vanguard, BlackRock, Fidelity, and TIAA. These funds represent hundreds of billions in AUM. Now you can see how much of that is invested in fossil fuel companies, arms manufacturers, and private prison companies.
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What are target date funds?
Target date funds are broadly diversified investments, similar to balanced funds, but they are offered as a series of funds, aimed at different “target dates”.
As a people move closer to retirement, they often prefer safer investments. Nobody wants to arrive at retirement and find out their savings have been lessened at the last moment due to risky investments. But when retirement is further away, introducing more risk can be a way to achieve greater gains, with the hope that risk-related losses could be offset by the additional time in market.
Target date fund series offer funds aimed at different “target dates”, marketed to people who are planning to retire around those dates. For example, someone looking to retire in the year 2030 would invest in the 2030 version of a target date fund; someone younger expecting to retire in the year 2060 would invest in the 2060 version.
As that “target date” year comes closer in time, the portfolio moves away from riskier investments like stocks, and invests more in safer investments like bonds. This gives the plan participant the security of knowing that even if they keep their savings in that fund throughout their working career, the fund manager is working behind the scenes to manage risk appropriate to their circumstances. This is what makes them good candidates for retirement plan default options.
These target date funds often don’t invest directly in stocks, but invest in other mutual funds (usually from the same asset manager to reduce fees). For example, here are the holdings of a very popular target date fund, the Vanguard Target Retirement 2050 fund:
1. Vanguard Total Stock Market Index Fund – 54%
2. Vanguard Total International Stock Index Fund – 36.5%
3. Vanguard Total Bond Market II Index Fund – 6.5%
4. Vanguard Total International Bond Index Fund – 2.9%
5. Vanguard Total International Bond II Index – 0.1%
The other target dates offered by this target and series will usually invest in the same portfolio of funds, but with different allocations to the stock funds and bond funds (more in bonds for dates closer to today, more in stocks for dates further out).
Rating target date funds
Because target date funds are offered as a series, and because they are often structured as “funds of funds”, there are some extra steps involved in applying the letter grade rating systems.
First, we unpack the funds held by the target date fund, and re-weight and recombine the holdings to produce a list of stocks held by the target date fund. For example, if a target date fund invests in two different mutual funds that both invest in ExxonMobil, those two ExxonMobil holdings are re-weighted and recombined to represent the total exposure of the target date fund to ExxonMobil.
Second, we use the 2050 version as the representative of the target date fund series. For most target date series, the 2050 fund will be approximately 85-95% invested in stocks, with the remainder invested in bonds and other fixed-income assets.
Target date series usually have the same mix of stocks regardless of which date is chosen, but the percent allocated to stocks overall goes down for dates closer to today. This means that, for example, a 2030 version of a target date fund series will likely have exposure to the same companies as the 2050 version, but at lower percentages.
Why the 2050 fund?
The 2050 version of a target date fund is marketed at people who are looking to retire in the year 2050, which is 30 years away, meaning it is more weighted towards stocks vs. other asset classes. Because our analysis is based on tracking stock investments, this gives us a good representation of the asset manager’s decisions in selecting investments for the target date fund portfolio.
Which target date series are rated?
As of Summer 2021, we’ve rated 12 target date fund series from major asset managers like Vanguard, BlackRock, Fidelity, and TIAA. Our goal is to expand this dataset over the next year to cover all target date fund series offered by major asset managers. We started with these 12 because they are some of the largest and most commonly-owned target date funds on the market, with hundreds of billions in assets under management. Check back regularly to see if your target date fund series has been added to our database.
Want us to rate the target date fund series in your retirement plan? Get in touch with us
