Target Date Fund Fees
The average asset-weighted target date mutual fund fee has come down 40% over the past decade, from 1.03% in 2009 to .62% (62 basis points) today.
Current Mutual Fund Fees
Note the majority of target date funds have fees above the average fee of 62 basis points. This is because Vanguard manages 40% of the $2 trillion in TDF assets, and Vanguard is the low cost provider at 15 bps.
Collective Investment Trust Fees
Collective Investment Trusts (CITs) are provided by banks and are monitored by bank regulators rather than the SEC. Operating costs are lower for CITs than mutual funds, so they are generally less expensive. In addition to lower costs, CITs differ from mutual funds in two important ways. CITs can only be held in qualified plans like 401(k) plans; they cannot be owned by individual investors. Also CITs serve as fiduciaries to pension plans whereas mutual funds do not.
There are 53 CIT families on the Morningstar database. 47 are less expensive than the average mutual fund fee of 63 bps. The average CIT fee is 44 bps. 15 CITs are also offered as mutual funds, and all 15 are less expensive. Here is a comparison of these 15 funds/CITs.
Why fees are coming down
As shown in the following graph, TDF fees have decreased dramatically over the past decade:
Fees have decreased for 2 reasons:
- Several lawsuits alleging excessive fees have been won, putting downward pressure on fee schedules
- Vanguard TDFs have been attracting most of the new cash flow thereby reducing the average asset-weighted fee
All told, there were 31 “excessive fee” suits filed by attorney Jerry Schlichter and other firms during 2006 and 2007, according to data from Groom Law Group. Last year, there were 29 new cases filed through September, according to Groom Law Group’s most up-to-date data. That’s the largest annual total to date, and there’s no sign the pace is slowing down.
Vanguard swelled its target date assets by $26 billion in 2018, the biggest increase of any firm, according to Sway Research, which studies asset management distribution in retirement plans. With $800 billion held in its target-date mutual funds and CITs, the index fund behemoth now controls 40% of the roughly $2 trillion market, according to Sway. The asset manager’s market share has swelled five percentage points, from 35%, in the past three years.
Why Fees Matter
Every dollar of expense is one less dollar you will have available for your future use.
Another old saying is: “you get what you pay for” in this life. However, it has been shown to be untrue when it comes to TDF investing. There is no evidence showing higher fees have some relation to higher returns. Said differently, lower fees mean better net returns for most investors.
You should be extra cautious when advisors and consultants layer their fees on top of the firm that provides the TDFs. Plus, depending on the structure of the fund there can be additional fees for marketing, custody, transactions and administration.
About the Author: Ron Surz is CEO and CIO of GlidePath Wealth Management an innovative money management firm that uses a patented investment process to invest retirement assets that are held outside qualified retirement plans. GlidePath manages Target Date, Invest-for-100, Special Situations and Recession Protection Portfolios.