DH and I just did a bunch of reading and calling (which we were planning on doing in August, but hey, I didn’t want to get any work done today anyhow).

We’re going to max out our mandatory optional plan (not that we have a choice). But we are going to move it from ING, where on average we were paying 1.45% in fees for an index fund (!) (We called… and made sure, yes really .7% + .75% for a Largecap index) to TIAA-Cref where it LOOKS like we can get the same or better indexes for .34% in fees instead. We need to meet with someone from TIAA-CREF to make sure.

The 457 looks tempting if we wanted to access the funds young without penalty, since apparently we can tap into a 457 if we leave state employment, but their weird step-function of fees is adding something like .5% on top of the Vanguard funds they offer. We can do the TDA 403(b) with TIAA-CREF so we’ll go back with them for the 403(b). Though for now I think we’ll stay away from lifecycle funds since without Vanguard as an option the do-it-yourself method is so much cheaper. If we still have money leftover this year, we’ll start on the 457s next year, but this year we’ll put anything extra at the mortgage since that’s easier to control the extra payments on every month.

Again, thanks so much for this post. It helped a lot with making sense of all these different options and corrected a misconception I had. I will be happy when federal legislation to simplify all of this gets passed.

My understanding is that you can actually contribute to both the 403b and the 457 as well and each up to its limit 16.5K for a total of 33K. However, please check with your HR/Benefits department.

http://www.457bwise.com/faqs/index.html

http://www.403bwise.com/wisemoves/403band457.html

I am impressed as well that you can save for both. Congratulations!

Unfortunately, I don’t have access to a 457 plan I (and DW) contribute to the max to 403b and a Roth.

I believe the limits are separate (link below), but make sure to confirm with your employer. I’m impressed that you are even considering saving more than the $16,500 limit!

http://www.prudential.com/media/managed/2010Limits_Govt-Bulletin-1009.pdf

Your employer matches up to 6%…that’s awesome. Hopefully, they also offer low-cost index and target-date funds.

And, hey, if you’re answering free questions…
Our mandatory plan is an “optional retirement plan” 403(b) and we can contribute up to 6% of our salary to it with 100% match.

After that we have the option of the following, up to the federal limit:

Any thoughts on:
1. Tax-Deferred Account Program (TDA) – A voluntary program in which you may make pre-tax or after-tax (Roth) contributions. This is a defined contribution plan under Internal Revenue Code 403(b) which you decide how to utilize your account balance upon retirement.

vs.

2. Deferred Compensation Plan (DCP) – A voluntary program to which you make pre-tax contributions. This is a defined contribution plan under Internal Revenue Code 457(b) which you decide how to utilize your account balance upon retirement.

And is the 16.5K limit for each of these separately or could a person theoretically contribute 32K?

Don’t feel you have to answer though… eventually I’ll get this stuff figured out. I feel a little guilty since I’m not paying you 1% of my assets.

Fidelity Freedom 2040 (FFFFX) 0.81%
T. Rowe Price Retirement 2040 (TRRDX) 0.79%
Vanguard Target Retirement 2040 (VFORX) 0.20%
Principal LifeTime 2040 Instl (PTDIX) 0.82%
TIAA-CREF Lifecycle 2040 Retire (TCLOX) 0.72%

Note that expense ratios even for the same fund family may differ by target-date.

Glad you found the post useful. Don’t be shy with follow-up questions!

I’m going to have to look at TIAA-Cref again because that doesn’t look as crazy conservative as I’d thought. I wonder if I just got it wrong or if there was a typo in the literature I had. If its fees are reasonable it might be the right option… that would eliminate a lot of hassle.

Any ideas what the fees are?
This one confused me because it has two sets listed:
Gross Expense Ratio : 1.45%
Net Expense Ratio 1 : 0.72%
Which number is the one I should be comparing to Fidelity’s .79%?

ETA: Wikianswers tells me it’s the Net Expense Ratio I should care about.

Also agree this is a great post. I think the really useful posts often don’t get a lot of comments because they’re informational and not contentious.

Looking at the chart above, the 2030 funds all have around 80% in stocks, although that drops over the coming years. This is far more aggressive than the rule-of-thumb of investing your age (as a %) in bonds. Your decision to take even more risk than a 2030 fund is really a personal one that depends on how much risk you are comfortable with, how much you can afford to start saving, and your retirement plans.

@Nicole(21):
Here’s an updated chart with Principal and TIAA-CREF added (source: Morningstar as of 7/8/2010):
http://www.mariposacap.com/blog/wp-content/uploads/2010/07/stock_glide_path2.png

According to this, TIAA-CREF doesn’t look that conservative. It’s actually very close to Vanguard until retirement.

@Paul(8):
“I just wanted to say this post is a great guide to picking a target date fund despite the few comments it’s received so far.”

Thanks, glad you enjoyed it!

I chose those 3 fund families (Vanguard, Fidelity, T Rowe Price) because they were the 3 largest funds according to Morningstar, so it was an easy way to cover most investors. The analysis in the post can easily be extended to other funds (ING, TIAA-CREF, etc) by looking up their glide paths and expense ratios on their website.

If I have time later today, I can post an updated chart.

@Anna(#9), Carter(#16)

I couldn’t have said it any better.

I remember the day I started helping my in-laws with their investments. It took a long time to locate all their investments because they were not tracking them using something like Mint/Quicken/Excel. Half way through the discussion, they realized they had forgotten an account, and they went back to digging up paper statements.

For someone like me, who tracks spending and investments diligently, it was unbelievable. For people like them, who do not have the time or interest to build their own portfolio, target-date funds are a good default option.

@20… Also they’re the three most likely to show up in your employer plan. And yes, I’d like to see the comparison with TIAA-CREF too.

I don’t see it this way. These are three of the most credible investment companies we have and is a great representative sample.

Personally, I think target-date retirement funds can be a great solution for most people.

Picking any investment and then forgetting about it is never a good solution, but the fact is that it happens a lot. (Probably less common for readers of this site than for the population at large.) If you accept that there’s always a possibility that you will forget about things like rebalancing, and a smaller possibility that you may even forget about an entire account (believe me, it does happen), you will probably be much better having that money in a target-date fund.

No one else has a right to the number, and they rarely ask! 2

The problem is the choices available through the employer for the 401(k)/403(b). There are a huge number of not very good options.

@Nicole(#3) I’m not sure what your particular situation is, but if you want to invest in a T. Rowe Price or Vanguard Target Date Fund, the best way to do it is directly with them (ideally in an IRA). If you have an IRA with ING, you can roll it over to either of them.

@Sam(#4) While some Target Date Funds may charge more than the average of their underlying funds, that is not the case with the Fund Series mentioned here. For example, setting up the exact same portfolio of index funds as Vanguard’s Target Retirement 2040 Fund would result in an expense ratio of 0.206% (and you would have to pay a purchase fee each time you bought the Emerging Markets Index). The Target Fund itself is .20%.

@Steve(#2): Picking a different year might not change your immediate allocation, but it will change how quickly you glide to the safer allocation. That will make quite a difference in your overall risk level for the long haul.

@Sam(#4): I’m not sure which target date funds you’re referring to that have a higher overall cost than other funds. Vanguard at least doesn’t add any additional expenses to their target date funds. The expense ratio is simply the blended ratio for the underlying funds.

I agree with you that buying a target date fund (one-time or on a recurring basis) and forgetting about it is not a good way to manage your retirement investments. But it’s a good temporary solution until you’ve learned more about asset allocation, diversification, controlling your emotions, and other important investment topics. These funds can also help you invest while you’re saving up to meet fund minimums for a more sophisticated portfolio.

J.D. – Not to promote my own pages here, but if you think it’d be useful you can share this link to a portfolio allocation calculator using Vanguard funds. It accounts for fund minimums and your age (but not your overall risk tolerance – you’ll have to adjust for that yourself). http://www.providentplan.com/508/how-to-invest-for-retirement-a-diversified-investment-portfolio/

Sam mentioned that the cost is higher than other funds … partly true (compare Vanguard’s target fund to the total stock market fund and there’s ~.1% difference) but generally not accurate when comparing with the majority of other index funds.

Vanguard’s annual expense ratio (that __% cost per year) is low for all their funds relative to other investment agencies as made clear above.

Sam, you’re off the mark in criticizing those who “stick all [their] retirement money into a target fund and forget” … rather, those who elect to invest in higher cost funds (nearly all are higher cost the the Vanguard fund here) are prone to emotional shifts in their asset allocation and/or failing to shift their allocation as they approach retirement.

In fact, the Vanguard Target funds are:
(1) Low cost (0.2% is nearly as low as you can find!)
(2) Well reasoned allocations (fitting neatly into JD’s suggestions in “Your Money: The Missing Manual” along with many others’ recommendations)
(3) Easy to understand (the website is clear about what the investments include and how they change over time).

For a very well reasoned account of why investing in a Target Retirement (or lifecycle) fund is an excellent idea, see “Nudge” (which JD has repeatedly referenced on GRS):
http://goo.gl/ECCp (Google books link to Target Date discussion in the book, more on the Nudge Blog).

Great discussion by the BogleHeads on Target Date Retirement funds:
http://www.bogleheads.org/wiki/Vanguard_Target_Retirement_Funds

Simply put, if you want to make a good decision based on conventional wisdom, the Vanguard Target Date retirement funds are an excellent pick at a low cost. If you think you know more than the conventional wisdom and current investment research, try something else.

I’m from Spain and I have been having a LOT of problems to get low cost target date funds. Fidelity has them but they charge 1.5% management fee. Do you know of any other that is sold in Spain? Or Europe?

There are target date funds available in my 401k, but the expense ratios are so high (over 1.5%) that I just hold index funds instead. If I stay at this job long enough, I’ll eventually have to adjust them myself – they are mostly stock funds, heavy on the international & small cap – but otherwise I can just roll them into my Vanguard IRA with everything else.