TD funds are definitely legit and a very good option for 95% of 401k participants. Probably a great option for 100% of 401k participants actually.
There’s tons of info available on participants’ returns based on how they invest. Do they use a QDIA fund (like a TD), pick funds themselves, or use a brokerage window and go crazy? Over time, participants that buy the appropriate TD fund and stuck with it dramatically outperformed the other two groups.
That’s not to say TD funds are perfect or one is as good as another. There are lots of things to consider, the glidepath being the most importants. Is it “to” or “through” retirement, what’s the asset allocation look like, are their holdings listed as fixed income that really behave like equity (HY for example) that may cause the participant to be taking on more risk than he/she wants?
I use one for the bulk of my 401k. But, for example, I wanted to up my exposure to EM and Non-US so I added there on my own. Overall though? I highly recommend them for just about everyone.
How to choose a good one? That’s another discussion altogether.
good reads STL
Did you add EM / non-US inside your 401K?
I’d think that’s a bad idea, tax-wise; since any foreign taxes on dividends cannot be claimed as tax credits on your 1040 unlike in a taxable account. Of course, you may think that the non-US securities have enough appreciation potential to overcome the tax disadvantage.
Edit to add: this is also why I dislike the TD choices from my 401K provider - they are heavy in stocks from countries with heavy taxes on dividends - like Switzerland - but the bastards show performance figures as if no taxes have to be paid.
^Yes, inside my 401k. As to the tax disadvantages, I have no idea. Not something I’m materially concerned with, though maybe it should be.
As for reporting figures, I can assure you 99% of mutual fund companies report performance figures net of expenses including taxes.
Ask anyone that (used to) work at F-Squared what happens when you try to add a few extra bps to your returns.
^ You are right, I was wrong about them not considering taxes.
The way they calculate performance however is still a little strange. They assume that the benchmark index gets taxed the same as their international fund. So the benchmark returns become lower. But in fact if I held the benchmark (or an ETF derived from it) in my taxable account, my returns would be higher due to tax credits and their international funds would look worse. But then again, I could hold their fund in my taxable account and get the same tax credits. So their way is not so bad after all. Definitely better than assuming tax breaks.
The only form of “target date” funds I use are fixed income only funds that are liquidated on specific years only for the purpose of protecting capital value (with full return of principal) within a 1 - 3 year time frame at the most. Of course the return is paltry but its a position I take only to seek bond exposure with the prospect of reinvestment at higher rates should the Fed ever let nature take its course.
Don’t do any of the balanced fund type target dating as I prefer to make those choices myself and retain flexibility.
They are certainly popular and sell. People like to think they can just buy something and forget about it.
I’m not a big fan though. It’s less than clear that it makes sense to move that much of your equity exposure to bond exposure as you get older. Moreover, these strategies are so easy to implement that it doesn’t make sense to pay the huge fee for someone else to do it for you.
Agree 100%.
Target-Date funds are for people who have absolutely no idea about anything, except how old they want to be when they retire. For anybody with even an entry-level sophistication about investing, you should be able to change your own allocation based on whatever factors you see fit. And if retirement age is the only factor, then invest accordingly.
To pretty much everyone above - that’s why paying attention to the glidepath is the number one factor when choosing a TD fund. Want something conservative? Try PIMCO’s (though they got more aggressive recently). Want more equity (in general), go with T Rowe. Want less bond exposure? Buy the target-date series five or ten years after you intend on retiring (i.e. instead of buying the 2045 fund, buy the 2055 fund).
Yes, we’re all smart people and could probably manage our retirements just fine. But do I really want to manage my own glidepath and asset allocation to that level of detail? Ain’t nobody got time for that.
Still, like I said above, it’s a good core play. No reason you shouldn’t have some fun around the edges.
hows your 401k structured
DIY. All stocks and stock ETFs.
I know it’s a terrible idea in terms of volatility, but I have enough time that buying bonds or being in cash right now is just going to drag down the returns. And I am not bothered by huge drops (like we saw in 08 Nov or 09 Mar). I do think I am in a minority here.
Also, after having gone through the CFA material, buy-and-hold seems to be an OK strategy over the long term when the market is not to going to trend continuously, nor oscillate up and down around a flat level. So probably better than either CPPI or periodic rebalancing (as done in balanced funds like TD funds.) My stocks are obviously buy-and-hold; and the ETFs are very low-turnover (< 10% in all cases, so on average they hold a stock for 10 years or more.)
i was asking greenman not naren
But mine is better than his. Read and learn.
Gross and net of hypothetical tax returns are included in the prospectus. Gross is what is usually published elsewhere. Transaction costs, commission, spreads, and market movement, never disclosed, but reflected in performance figures. Estimated to average 1.44% across the industry for all mutual funds. Market movement being the biggest hurdle and correlated to the position sizes of the fund holdings. Passive and low turnover funds having the lowest hidden costs.