Target-Date Funds: Glide Paths and Costs

Target-date funds manage over 3 trillion in assets because they solve the hardest problem in investing: getting people to actually stay invested with an appropriate allocation. Pick a fund matching your retirement year, and it automatically shifts from stocks to bonds as you age. Simple. But simplicity hides important differences - a 2025 fund from Vanguard holds 30% stocks while Fidelity holds 41% stocks. Same target date, 11 percentage points different (Morningstar, 2024).

The durable lesson: Target-date funds are not interchangeable. The glide path (how fast and far they reduce equity exposure) varies significantly by provider, and that difference compounds into tens of thousands of dollars over a retirement.

How Target-Date Funds Work

The core concept:

Young: High stock allocation (growth)
Approaching retirement: Gradually shift to bonds (stability)
In retirement: Maintain conservative allocation (preservation)

Example: 2055 Target-Date Fund

Today (30 years from target): ~90% stocks, ~10% bonds
10 years out: ~75% stocks, ~25% bonds
At retirement (2055): ~50% stocks, ~50% bonds
7 years after retirement: ~30-40% stocks, ~60-70% bonds

The glide path: The predetermined schedule of allocation changes over time.

To vs. Through: A Critical Distinction

To Funds: Reach their final allocation AT the target date. If you retire in 2025, a To fund is already at its most conservative allocation.

Through Funds: Continue adjusting for 7-10 years AFTER the target date. A 2025 Through fund is still shifting more conservative today.

Why it matters: Vanguard average withdrawal start age: 72 (Vanguard research). If you retire at 65 but do not touch the money until 72, a Through fund keeps working for you during that gap.

Provider Comparison: Same Year, Different Allocations

At Target Date (Age 65):

Vanguard Target Retirement 2025: 50% stocks
Fidelity Freedom 2025: 54% stocks
Schwab Target 2025: 55% stocks
T. Rowe Price Retirement 2025: 55% stocks

Seven Years After Target (Age 72):

Vanguard: 30% stocks
Fidelity: 41% stocks
T. Rowe Price: 40% stocks

Difference impact: 11 percentage points more in stocks = higher volatility, higher expected return. In a 40% market decline, the Fidelity holder loses 4.4% more of their portfolio than Vanguard holder (11% x 40%).

The point is: Check the actual glide path. Do not assume all 2025 funds are equivalent.

Cost Comparison

Expense Ratios (2024):

Vanguard Target Retirement: 0.08%
Fidelity Freedom Index: 0.12%
Schwab Target Index: 0.08%
T. Rowe Price Retirement: 0.52%
Average target-date fund: 0.34%

30-Year Cost Impact (500,000 initial, 7% gross return):

Vanguard (0.08%):

Net return: 6.92%
Ending value: 3,691,000

T. Rowe Price (0.52%):

Net return: 6.48%
Ending value: 3,268,000

Difference: 423,000 over 30 years from 0.44% fee difference.

The durable lesson: Low-cost target-date funds (under 0.15%) capture most of the convenience benefit without the fee drag.

Glide Path Philosophy: Vanguard vs. Fidelity

Vanguard Approach:

Straight-line glide path
Starts at 90% stocks
Reaches 50% at retirement
Settles at 30% stocks 7 years after target
Philosophy: Prioritizes capital preservation in retirement

Fidelity Approach:

Rolldown method
Holds higher equity until ~20 years before retirement
Then steeper reduction
Settles at 41% stocks in retirement
Philosophy: Prioritizes growth through retirement (longevity risk)

Neither is wrong - they optimize for different risks. Vanguard fears sequence of returns risk (bad markets early in retirement). Fidelity fears longevity risk (outliving your money).

One-Fund Solution: Benefits and Limitations

Benefits:

Automatic rebalancing (no work required)
Age-appropriate asset allocation
Diversification across asset classes
Behavioral benefit: Harder to panic-sell when its all one fund
No decision fatigue

Limitations:

One-size-fits-all (does not account for individual circumstances)
Cannot customize stock/bond mix
Cannot adjust for other assets (pension, Social Security, real estate)
Some have higher fees than DIY index portfolio
Underlying funds may not be optimal

Example limitation: You are 55 with a government pension replacing 60% of income. A 2035 target-date fund assumes you need typical retirement income from the portfolio. Your pension changes the math - you might want MORE stocks because you have guaranteed income.

Performance: Does It Matter?

Morningstar 2024 Rankings: Vanguard Target Retirement funds ranked in top quartile among peers (24th of 115 for 2025 fund).

Why performance varies:

Different underlying funds (index vs. active)
Different asset classes included (REITs, international, TIPS)
Different rebalancing frequency
Different expense ratios

The caveat: Past performance does not predict future results. Focus on costs and glide path philosophy more than recent returns.

How to Evaluate a Target-Date Fund

Step 1: Check the expense ratio

Under 0.15%: Excellent
0.15-0.35%: Acceptable
Over 0.50%: Likely too expensive

Step 2: Understand the glide path

What is equity allocation at target date?
What is final equity allocation (landing point)?
Does it match your risk tolerance?

Step 3: Review underlying holdings

Index funds or active?
What asset classes are included?
Are there any unusual tilts?

Step 4: Consider your full picture

Other retirement accounts (different target dates?)
Pension or Social Security
Real estate or other assets
Risk tolerance

Common Mistakes

Owning multiple target-date funds with different dates If you have 2030 and 2045 funds, you have created a custom glide path you probably did not intend. Pick one date.

Combining target-date fund with other investments Adding a stock fund to a target-date fund defeats the purpose. The fund already has stocks. You are overriding the glide path.

Choosing based on name recognition T. Rowe Price has a great reputation but charges 0.52% vs Vanguards 0.08%. Over 30 years, that costs hundreds of thousands.

Not checking glide path differences Assuming all 2040 funds are the same. Vanguard 2040 and Fidelity 2040 have different stock allocations.

Checklist

Before choosing a target-date fund:

Expense ratio under 0.15%
Glide path matches your risk tolerance
Understand To vs Through (when does it reach final allocation?)
Know the equity allocation at your target date
Know the final landing point allocation
Consider other retirement income sources
Plan to use it as only holding in that account (do not mix)

References

Vanguard (2024). Glide Path Methodology and Research.
Morningstar (2024). Target-Date Fund Landscape Report.
Fidelity (2024). Freedom Fund Investment Approach.

Target-Date Funds Glide Paths and Costs