Many target date funds have disadvantages like high fees and too great an allocation to conservative fixed income assets.
Even among the best target date funds, you can end up paying relatively high expense ratio fees. The steepest annual fee on our list is 0.65% a year, but some of the most expensive funds in the category can weigh in well above 1%. By way of comparison, the very best value ETFs carry expense ratios as low as 0.04%.
While the differences among these fees may seem trivial, they can still have an outsized impact on your retirement. A paper published by the U.S. Department of Labor found that a one percentage point difference in fees and expenses would reduce your account balance at retirement by 28%. That’s not a trivial amount.
An optimal asset allocation is another important consideration with target date funds. One common criticism of target date funds is that they become too bond heavy in the ten to fifteen years ahead of your target retirement date, potentially causing you to lose out on significant equity gains in the process—depending on market performance, of course.
Your final decade of working is when your portfolio is at its highest balance, and compound interest can really get to work for you. If you’re invested in a target date fund carrying 50% or more in bonds at that point, you’ll miss out on growth and have a less abundant retirement because of it.