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 Target-Date Landscape, recent editions).

What matters here: 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

Recent expense ratios (verify before investing—T. Rowe Price has cut its TDF fees materially in recent years):

• Vanguard Target Retirement: ~0.08%
• Fidelity Freedom Index: ~0.12%
• Schwab Target Index: ~0.08%
• T. Rowe Price Retirement Blend (index-based): ~0.18%
• T. Rowe Price Retirement (active): ~0.45%
• Industry average target-date fund: ~0.30%

30-year cost impact ($500,000 initial, 7% gross return):

Vanguard (0.08%):

• Net return: 6.92%
• Ending value: ~$3,691,000

Higher-cost active fund (0.45%):

• Net return: 6.55%
• Ending value: ~$3,330,000

Difference: ~$361,000 over 30 years from a 0.37% fee gap. Even within a single fund family the index series can save hundreds of thousands over the active series. The lever you control: pick the index version where one exists.

The signal worth remembering: 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 without checking the share class T. Rowe Price has a great reputation, and its Retirement Blend index series now runs around 0.18%—competitive with the rest of the industry. But the active Retirement series can run 0.40%+, versus Vanguard’s 0.08%. Over 30 years, even a 30 bp gap costs hundreds of thousands. Always check the actual share class your plan offers, not just the brand.

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.