In Defense of Target-Date Funds in 401(k)s

September 28, 2021

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What You Should Know About . . . Target-Date Funds” (Journal Report, Sept. 7) could leave readers with the impression that target-date funds (TDFs) are expensive, inefficient and potentially inappropriate for unwary investors. Most of us who study retirement policy like the idea of TDFs in 401(k) plans because they rebalance automatically each year and get less risky as an employee approaches retirement, and employers can get sued if the funds are too expensive. Investors in TDFs perform better because they leave their investments alone. According to a recent Morningstar analysis, TDFs were the only category that avoided 10-year dollar-weighted investor underperformance because investors felt they could “set it and forget it.”

Vanguard is the largest TDF provider in the world. The article cites the Vanguard Target Retirement 2050 Fund’s annual expenses ratio of 0.15%. That fee doesn’t reflect the institutional share classes available to most 401(k) investors; $33.35 billion is held in the institutional version of this fund with an expense ratio of 0.09%. The article also cites exposure to capital-gains taxes as a “downside” for TDFs, but this is a downside shared by all mutual funds, and one not faced by workers who save in TDFs through a tax-deferred 401(k) or IRA.

The defined contribution system has seen many important changes that have increased savings, improved investment performance and reduced costs. One of the most important was allowing employers to default workers into qualified default investments such as TDFs.

Prof. Michael Finke

The American College of Financial Services

King of Prussia, Pa.

David Blanchett


Newark, N.J.

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Appeared in the September 28, 2021, print edition.