A good fee for a target-date fund is generally considered to be an expense ratio below 0.20%, with some of the most competitive options available featuring expense ratios well under 0.10%. Keeping costs low is crucial for long-term investment success, as even small differences in fees can significantly impact your total returns over decades.
Understanding Target-Date Fund Expense Ratios
The expense ratio is the annual fee charged by the fund, expressed as a percentage of your invested assets. This fee covers the fund's operating costs, including management, administration, and marketing expenses. These costs are automatically deducted from the fund's assets, reducing your overall returns. Lower expense ratios mean more of your money remains invested and grows over time.
For investors nearing retirement, target-date funds offer a convenient, diversified, and professionally managed investment solution. These funds automatically adjust their asset allocation over time, becoming more conservative as you approach your target retirement date. When evaluating these funds, the expense ratio is one of the most important factors to consider, as it directly impacts your net returns.
Examples of Target-Date Fund Expense Ratios
Top target-date funds with low costs typically demonstrate expense ratios well under the industry average. Here's a look at some examples of expense ratios for various target-date funds, specifically for a 2045 target date:
| Fund Name | Symbol | Expense Ratio |
|---|---|---|
| Vanguard Target Retirement 2045 Fund Investor Shares | VTIVX | 0.08% |
| Fidelity Freedom Index 2045 Fund Investor Class | FIOFX | 0.12% |
| Nuveen Lifecycle Index 2045 Fund Premier Class | TLMPX | 0.25% |
| American Funds 2045 Target Date Retirement Fund Class R-5 | REHTX | 0.42% |
As you can see from these examples, there's a significant range in expense ratios. Funds that track broad market indexes, often referred to as "index funds," tend to have much lower expense ratios compared to actively managed funds, which involve fund managers making individual stock or bond selections.
Why Low Fees Matter
Even a seemingly small difference in expense ratios can lead to substantial differences in your portfolio's value over several decades. For instance, if you invest $10,000 in a fund that returns 7% annually, a 0.10% expense ratio would mean you effectively earn 6.90%, while a 0.50% expense ratio would mean you earn 6.50%. Over 30 years, that small difference could amount to tens of thousands of dollars in lost returns.
When selecting a target-date fund, prioritize options with competitive, low expense ratios. Opting for index-based target-date funds is often a reliable way to ensure you're keeping investment costs to a minimum.
