Vanguard vs T. Rowe Price Target Date Funds

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Point of Interest

Vanguard and T. Rowe Price target date funds are convenient well-diversified standalone retirement savings options investors use to plan for retirement and other future financial needs.

For new investors, planning for retirement can be an intimidating task, and choosing the right funds to invest in can be confusing. The T. Rowe Price 401(k) and the Vanguard target funds are some of the most popular on the market, making them a good option. Target date funds make investing easy because the funds are chosen based on the year you plan to retire. As retirement approaches, the fund is rebalanced from aggressive to conservative investments to preserve assets.

This convenient hands-off approach to retirement investing is why target date funds are offered as employer-sponsored retirement plans. But not all target date funds are created equal, even when you compare funds for the same retirement year.

FundMinimum DepositAverage 1-yr ReturnAverage 5-yr ReturnAverage 10yr ReturnDividend Yield (As of December 2019)
Vanguard Target Retirement 2035 Fund$1,000-1.76%4.97%7.83%$0.52/share annually
T. Rowe Price Retirement 2035 Fund $2,500-3.07%5.11%8.21%$1.08/share annually

Rates accurate as of April 30, 2020.

What is a target date fund?

A target date fund is an all-in-one retirement investment option named for the year you plan to retire. For example, the Vanguard Target Retirement 2035 Fund is created for those planning to retire in the year 2035.

Target date funds contain a diversified mixture of stocks, bonds, mutual funds, or index funds that get rebalanced over time to meet specific retirement objectives. They typically start out heavily invested in growth stocks, and as the portfolio matures and retirement date approaches, the fund slowly rebalances into conservative bond investments. Target date funds make investing more straightforward for the average hands-off investor, but what’s interesting is that they are designed to work as standalone investments.

You can invest in target funds through an employer-sponsored retirement plan or Individual Retirement Account (IRA). Vanguard and T. Rowe Price offer different target date funds that fit your risk tolerance and anticipated retirement year.

Vanguard vs. T. Rowe Price target date funds

Vanguard and T. Rowe Price are two popular investment platforms that offer various target date funds to match your financial needs. But just because two funds have similar names, doesn’t mean your money is invested the same way.

Vanguard Target Retirement 2035 Fund (VTTHX)

The Vanguard 2035 Fund has the lowest fees, with a 0.14% expense ratio and the lowest initial investment of $1,000. For non-retirement accounts, a $20 per year fee can be waived if you opt for electronic account access.

The overall fund allocation starts out with 75.20% in stocks, 24% in bonds, and 0.72% in short-term reserves. The underlying funds are spread out among various low-cost domestic and international Vanguard index shares, which is why Vanguard has low fees.

Rowe Price Retirement 2035 Fund (TRRJX)The investor class T. Rowe Price 2035 fund expense ratio is 0.68% and requires an initial investment of $2,500.

Fund Allocation is a 79.59% mix of U.S. and international stocks, 16.47% mix of international and investment-grade bonds, and 3.93% in reserves. This fund has several individual TRP growth equity and fixed income holdings diversified into 12 different sectors, the largest being information technology. T. Rowe Price offers actively managed funds in different share classes.

Mutual fund expense ratio

While it would be great to have zero fees, target date funds are mostly a managed portfolio — you pay for someone to manage and rebalance the fund for you through an expense ratio. The expense ratio represents the ongoing cost of your investment portfolio. Typically, expense ratio fees are charged annually and based on a percentage of the portfolio assets. These fees go toward the administration and management of your funds.

It’s interesting to know that expense ratio fees will vary widely depending on the type of investments contained within a fund. The Vanguard target funds invest in low-cost index funds making the expense ratio lower than the T. Rowe Price target funds, which have actively managed individual TRP funds.

Expense ratios affect your overall portfolio, especially during retirement; fees are taken out of your investments as a percentage. As your portfolio grows, expense ratio fees get higher. For example, an expense ratio of 0.50% on a portfolio worth $5,000 the first year is only $25, but a portfolio of $400,000 will have a fee of $2,000 per year.

Average return on investment

While historical returns are not a guarantee for future results, you should take the time to research the average returns on the funds you’re considering. Compare one, five, and 10-year returns to their respective benchmark returns as well as the expense ratios, initial investment minimums, and dividend yields.

The T. Rowe Price 2035 fund came out ahead in the five and 10-year returns and offers a higher cumulative annual dividend yield of $1.08 per share. However, Vanguard’s 2035 fund has a lower expense ratio at 0.14% and lower initial minimum investment.

Vanguard Target Retirement 2035 Fund (VTTHX)

Average annual total returns (monthly)

Vanguard Target Retirement 2035 Fund 1yr5yr10yr
 -1.76%4.97%7.83%
Benchmark-0.82%5.33%8.13%

Rowe Price Retirement 2035 Fund (TRRJX)

Average annual total Returns (monthly)

T. Rowe Price Retirement 2035 Fund 1yr5yr10yr
 -3.01%5.11%8.21%
Benchmark-1.00%5.66%8.34%

Account minimum to get started

Every fund requires an initial minimum investment. Some mutual funds need as little as $500 and others as high as $100,000. Before you get started, be sure you have the required initial minimum investment to open an account.

The Vanguard and T. Rowe Price target funds have reasonable minimum investment requirements. For IRAs, Vanguard retirement funds for target dates 2030, 2035, and 2040 currently require an initial investment of $1,000 to open an account. To open an investor class (IRA) for a T. Rowe Price retirement target date fund for 2030, 2035, and 2040 requires an initial investment of $2,500.

Is a target date fund right for you?

A target date fund is right for you if it aligns with your retirement and financial goals. These funds are perfect for investors just entering the workforce or looking for an investment product within a 401(k) or IRA.

As a standalone investment, a target date fund has everything you need to get a fully diversified retirement investment started. However, for investors closer to retirement, or with other products already in the market, a target date fund might provide redundant fund allocations or expose your portfolio to undue risk in specific markets.

The final word

A Vanguard retirement fund or T. Rowe Price 401(k) target fund can be your one-stop-shop investment product if you’re looking for an easy and convenient way to save for retirement. Target date funds offer fully diversified portfolios designed to automatically grow your money and rebalance throughout the years so you can automatically save for retirement or future financial needs.

Christine C. Renee

Contributing Writer

Christine C. Renee is a personal finance writer who enjoys delving into money topics like budgeting and fintech. She has been published in Careful Cents, Investor Junkie, and Money Mini Blog. When not writing, she uses her bachelor’s degree in business admin to help micro-businesses and solopreneurs manage time and money. On her days off, you may find her with a book on information technology and security.