What Mutual Fund Type Is Taking Over 401(k) Plans?

From Bloomberg:

Their name:  Target Date funds.
Their share of 401(k) contributions in 2015:  More than half expected in 2015.
Their appeal: Simplicity (“the only fund that you will need”) and low fees.
Selection process: Choose target-date fund close to your retirement. If you are starting to work now and expect to retire in 40 years, then choose Target Date Fund 2055.
Composition: Mix of Stock/Bond funds (index funds preferred) that adjusts; as investor gets closer to retirement, moves more into bonds.
Fees: Average of 0.78%.  Vanguard as low as 0.17%

One way to deepen students understanding of this product is to compare two of the larger offerings: Vanguard and Fidelity.  Have them compare these funds across the following dimensions:

  • Fees (aka Expense Ratio)
  • Performance (1 and 3 years)
  • Allocation between stocks/bonds in these categories (Composition Tab):  Domestic equity (stock), International equity (stock), Bond Funds (combine Domestic and International), Short-term Funds (cash).  Also, calculate how much stocks are as %age of overall portfolio.
  • Number of funds held: How many funds make up each of the target date funds?  Are Vanguard and Fidelity pursuing active or passive strategies? Does this give you a better sense of why fees might differ with Target Date funds?

Based on this information, which fund would students choose and why?

Bonus question:  What would be the composition of funds in 2055 (at retirement)?