2040 Target Date Funds
Target date funds are a great way to simplify your retirement investments.
They give you a one-stop solution for retirement investing with a mix of stocks and bonds that continuously adjust as you near retirement.
If you’re in your mid- to late 30s, a 2040 fund would be right for you.
We’re going to take a look at two of the largest 2040 funds, the JPMorgan SmartRetirement 2040 Fund and TIAA-CREF Lifecycle 2040 Retirement Fund.
Given a choice between the two, which would I choose for an IRA or 401(k) retirement fund?
When I look at investment strategy and rate of return, JPMorgan seems to have a slight edge.
But it also has a whopping 4.5% buy-in fee, or “front-end load” as it’s called in the financial industry. That means savers must pay a 4.5% commission as soon as they invest.
Loads used to be the norm 15 years ago, but not anymore. And one of the first rules of investing nowadays is to look for lower expenses.
Does that tip the scales back in favor of the no-load TIAA-CREF fund?
Let’s start by comparing how these target date funds invest their money. (Story continues below graphic.)
Virtually all target date funds are what’s called “fund of funds,” which means they’re mutual funds that invest in other mutual funds.
JPMorgan spreads its money among 11 other mutual funds, and TIAA-CREF uses 15, to diversify their holdings. But those funds funnel most of that money into four types of assets: domestic and foreign stocks and bonds.
When investors are a long way from retirement, target date funds pursue an aggressive investment strategy that emphasizes stocks over bonds. As retirement nears, the funds become more conservative, selling stocks and putting an increasing share of their money in bonds.
This is often referred to as the fund’s “glide path.”
Right now, 77% of JPMorgan’s holdings are in domestic and international stocks. By the time 2040 arrives, it projects that will have dropped to 35%, with more than half of those stocks in big, blue-chip American companies.
The glide path for the TIAA-CREFF fund seeks greater growth through greater risk. Stocks currently account for 90% of its holdings, and it only expects that to drop to 50% by 2040.
All else being equal, I’d be inclined to go with JPMorgan’s more conservative investment strategy.
And some aspects of these funds are quite equal.
Both, for example, have a turnover ratio of 9%. That’s the percentage of their portfolios, on a dollar basis, that they sell and replace over the course of a year.
A typical target date fund turns over 20% or 25% of their holdings, and 30% is a red flag for too much churn. But obviously, that’s not a problem for either of these two funds.
They are decidedly unequal when it comes to fees, however.
The JPMorgan fund charges a higher management fee — 0.91% per year versus 0.74% for TIAA-CREFF.
(Both of those are on the high end of what we like to see target date funds charge but still under our maximum acceptable rate of 1% a year.)
Despite the slightly higher maintenance fee, the JPMorgan fund reports a 16.05% annualized return over the past five years, compared with a 15.65% return for the TIAA-CREF fund.
But which investors made the most money over that time?
If you’d put $10,000 in the TIAA-CREFF fund five years ago, your investment would have grown to nearly $20,700.
The $10,000 turned over to JPMorgan would only be worth $20,100 because of that 4.5% front-end load everyone must pay to buy into the fund. After that commission is deducted, the actual initial investment is $9,550.
If JPMorgan consistently outperforms TIAA-CREFF over the next 25 years, it could overcome that initial disadvantage and return a bigger dollar-and-cents return.
But past performance can’t predict future earnings. You can’t be assured JPMorgan will continue to produce better returns than TIAA-CREFF. (Indeed, over just the past year, it did not.)
The only thing you can truly count on is what you know. And what you know is that the JPMorgan fund is very expensive.
Choosing a no-load fund over a load fund is always a smart choice. And choosing a no-load fund with a lower annual maintenance fee is an even smarter choice.
After taking all of that into account, I’d set aside my preference for JPMorgan’s more conservative glide path and buy the TIAA-CREFF Lifecycle 2040 Retirement Fund.