Target Retirement Funds Portfolio Composition And Expenses: Vanguard vs Fidelity vs T Rowe Price

This is the first post in a series comparing and contrasting target retirement funds from three competing companies: Vanguard, Fidelity, and T Rowe Price. Today, I will be comparing the portfolio composition and expense characteristics of both the 2030 and 2005 funds from each company to get a good overview of the nature of these funds over the full investment life-cycle from 20 years out to recent retiree.

Vanguard Target Retirement 2030 Fund (VTHRX)

Vanguard’s Target Retirement 2030 Fund is the cheapest of the bunch by a wide margin and is in the middle of the pack as far as aggressiveness goes. Since Vanguard’s fund invests exclusively in index funds, it is also the most straight-forward choice of the group: you’ll never have to worry about substantially under-performing the market. Similarly, you’ll never out-perform it either. This slow-and-steady-wins-the-race approach should work very well for disciplined investors over the long term, making Vanguard’s fund ideal for the hands-off investor. One potential downside is the lack of real-estate as an asset class.

Minimum Investment: $3,000
Expense Ratio: 0.21%
Portfolio Composition:
Stocks: 85.03%
Domestic: 79.9%
Foreign: 20.1%
Bonds: 14.72%
Cash: 0.25%

Vanguard Target Retirement 2005 Fund (VTOVX)

Vanguard’s Target Retirement 2005 Fund is a solid, low-cost choice for conservative recent retirees. Although I personally think 41% in stocks is a bit low for somebody only a few years into retirement (I would recommend 45-55%), the Vanguard fund’s ultra-low expense ratio relative to everybody else goes a long way towards making up for this. This fund would be well-suited for investors with a low risk tolerance: aggressive enough to achieve real inflation-adjusted growth but tame enough so you don’t lose sleep over it. The fund’s almost 15% stake in Treasury Inflation Protected Securities (TIPS) should serve retirees well during inflationary periods, but will probably perform poorly when inflation is relatively low. That said, the U.S. government’s current fiscal policy will probably lead to higher inflation for the foreseeable future, so TIPS should make fine investments.

Minimum Investment: $3,000
Expense Ratio: 0.19%
Portfolio Composition:
Stocks: 41%
Domestic: 80%
Foreign: 20%
Bonds: 56.54%
Cash: 2.46%

Fidelity Freedom 2030 Fund (FFFEX)

Fidelity’s Freedom 2030 fund can be best summed up with one word: mediocre. Fidelity’s entry into the retirement fund market suffers from several significant flaws. It is composed of expensive-yet-mediocre funds that tilt too much towards the large-cap growth end of the style box. Coupled with the fact that it is significantly less aggressive (and more expensive) than either Vanguard’s or T Rowe Price’s entry and you have a fund with practically no chance of out-performing its competition over the long haul. This is not a bad fund by any means, but there are better, less expensive options available. Within the context of a 401k plan with few high-quality, low-cost alternatives I think this fund may be worth your investment dollars. But if you have the opportunity to go with Vanguard or T Rowe Price, do it.

Minimum Investment: $2,500
Expense Ratio: 0.76%
Portfolio Composition:
Stocks: 73.2%
Domestic: 77.5%
Foreign: 22.5%
Bonds: 15.6%
Cash: 4.9%
Other: 6.3%

Fidelity Freedom 2005 Fund (FFFVX)

Fidelity’s 2005 fund suffers from many of the same defects as its more aggressive 2030 counterpart. The fund is still expensive relative to the competition but appears to be slightly less growth-oriented and a bit more aggressive than you might expect. That said, this fund still isn’t particularly impressive. I’d pass unless you didn’t have access to the competition.

Minimum Investment: $2,500
Expense Ratio: 0.64%
Portfolio Composition:
Stocks: 44.4%
Domestic: 79.9%
Foreign: 20.1%
Bonds: 34.2%
Cash: 15.3%
Other: 6.2%

T Rowe Price Retirement 2030 (TRRCX)

Aside from Vanguard, T Rowe Price is probably my favorite mutual fund company (until recently, I owned TROW stock). While T Rowe Price eschews the index fund philosophy and advocates active money management, they at least do it in an intelligent, disciplined way. T Rowe Price management is first-and-foremost concerned with controlling risk. You won’t find many high-fliers here, but you also won’t find many big losers. T Rowe Price’s 2030 fund is the best choice for investors who want to take a stab at beating the market with bets on high-quality, growth-oriented companies. Costs are low enough not to present too large a hurdle and the underlying funds aggressive enough to give Vanguard a run for its money. To be sure, it is very unlikely you will beat the index fund portfolio over the long haul, but T Rowe Price does a good job of providing a chance at accomplishing that feat while minimizing the consequences of failure. If I had to rank them, I would rank Vanguard first with T Rowe Price a close second.

Minimum Investment: $2,500
Expense Ratio: 0.72%
Portfolio Composition:
Stocks: 84%
Domestic: 76.4%
Foreign: 23.6%
Bonds: 10.7%
Cash: 4.3%
Other: 1%

T Rowe Price 2005 Fund (TRRFX)

T Rowe Price’s 2005 Fund runs neck-and-neck with Vanguard’s 2005 fund in my book. While Vanguard is cheaper, T Rowe Price is more aggressive and more diversified internationally. I could really go either way on this one. It’s not difficult to imagine one of these funds substantially out-performing the other depending on particular circumstances and vice versa. Recent retirees would do well here.

Minimum Investment: $2,500
Expense Ratio: 0.58%
Portfolio Composition:
Stocks: 48.4%
Domestic: 81.7%
Foreign: 18.3%
Bonds: 44%
Cash: 5.7%
Other: 1.9%

Conclusions

Overall, I would rank Vanguard first in this arena with T Rowe Price a close second. Investors would do well investing with either of these companies. Fidelity finishes a somewhat distant third and I would not recommend them unless you had no other choice.

For more on this series: