Pay Fewer Fees by Reverse Engineering Retirement Date Funds

Target retirement date funds are a great place to get started investing. They do all the hard work of figuring out what to invest in and they even reallocate for you! Depending on your brokerage, you could be paying a hefty price for this service. Could you save 90% of your fees by doing this yourself?

. 6 min read. Investing.

This past week I was looking over the funds offered in my Fidelity 401k. A number of the funds listed are the very-easy-to-use “target-retirement” date funds. I love these funds. Mostly because there’s a great place to point people to who are just getting started.

Unfortunately, when I looked at the expense ratio, it was 0.75%! Considering that a similar portfolio could be pieced together with an average expense ratio of around 0.06%, I was shocked.

This is an extremely easy thing to do once you know how. Here’s a quick rundown of how to lower your fees by up to 90% in roughly 5 minutes.

What is a Target Retirement Fund?

These are a single fund that you can invest in that will hold a number of other investments in one. Usually, these will consist of the same strategy used for a three-fund portfolio, with a slight bit of weighting depending on far your time horizon is (the longer out, the more aggressive / the closer, the more conservative).

The “target” part refers to the date you plan to retire. Let’s say you’ve run your numbers (maybe with the interactive guide to FI) and you realize you can retire in about 20 years, that’d be close to the year 2038. These funds typically have a date that’s divisible by 5. I’d round this 2038 up to 2040. This isn’t because you’d be retiring later, but the higher the number, the more aggressive the fund. If you’d rather be more conservative you could round down to 2035.

Each of these funds will adjust based on their own formula to be more conservative the closer to the date chosen. This saves the buyer time (and knowledge) in having to reallocate their funds. This has an appeal to the lazy investor in me for sure.

Each investment location has their own name for this. Here are alllll the different versions of a 2040 “target retirement” fund at different places (along with their fees).

FundExpense Ratio
Vanguard Target Retirement 2040 Fund (VF0RX)0.15%
Fidelity Freedom® 2040 (FFFFX)0.75%
T. Rowe Price Retirement 2040 Fund (TRRDX)0.74%
American Funds 2040 Target Date Retirement
Fund ® (AAGTX)
JPMorgan SmartRetirement 2040 Fund0.76%
State Farm LifePath 2040® Fund (SAUAX)0.96%
USAA Target Retirement 2040 Fund (URFRX)0.78%

Their fees vary drastically. Right away the fee for Vanguard stands out as an outlier. Vanguard even makes this claim on their website:

This is 64% lower than the average expense ratio of funds with similar holdings.

They’re pretty far off on this. Their fees aren’t 64% lower than the average, they’re over 80% lower!  What was shocking to me is that the fees on these target retirement date funds are even higher than using a robo-advisor like Betterment or Wealthfront. The average fee in Betterment/Wealthfront, even with their advisor fee, comes out to around 0.37%. This is a half the fee charged by most companies.

Both robo-advisors and target retirement date funds solve the same problem – they’re a way to get started investing without needing to make all the decisions yourself. If you were to go this route, it’s clear how their fees shake out:

Vanguard funds > Wealthfront/Betterment > All other Target Date Funds

Luckily, if you already have a 401k or investments at one of the above places, there could be a way to stick with your current plan and save a bunch of money in fees. Let’s look into how this is done.

Finding a Comparison Point

There is one thing about these funds that’s really nice – they tend to publish what they invest in. They actually have to do this – all funds do. Take a look specifically at Vanguard Target Retirement 2040 Fund (VFORX). If you find this fund on Vanguards’ website and jump over to the “Portfolio & Management” tab, you’ll see this handy breakdown of everything the fund invests in:


Vanguard Target Retirement 2040 Fund

If you wanted to make the exact same investments on your own, this is the blueprint you could use for it. All you’d need to do is invest 51.8% in Vanguards Total Stock Market Fund, 33.9% in Vanguard Total International Stock Index Fund, 10% in Vanguard Total Bond Index Fund and the remaining 4.3% in Vanguard Total International Bond Index Fund!

…but should you? Is this going to save you time and money? In order to know that, we’d need to know the expense ratio of the target retirement date fund and the average expense ratio of our portfolio if we did it ourselves.

Comparing Self-Managed Fees with Target Date Fees

We know from the table above that the expense ratio (fee) for the Vanguard Target Retirement 2040 Fund is 0.15%. At first glance, this is a pretty amazingly low expense ratio. We can calculate what the expense ratio would be if we recreated this allocation on our own using Vanguards Admiral Funds.

FundExpense RatioPercent of 2040 Fund
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)0.04%51.8%
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)0.11%33.9%
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)0.05%14.3%

The weighted total at the bottom is the key here — 0.065%. That’s the expense ratio you’d get with Vanguard if you re-created a similar portfolio yourself. In my example, I combined Vanguards 2 bond funds into a single one, but it serves the same purpose.  That’s a 65% savings in fees by doing this yourself with Vanguard.

For this to work out with Vanguard though, you’d need to hit certain minimums. My example uses Vanguard Admiral funds. Vanguard has 2 classes of funds – “Admiral” and “Investor”. These funds hold the exact same thing, but their “Admiral” shares have a lower fee – up to a 1/3 the fee of the “Investor” ones. They come with a caveat though – you’ll usually need to invest at least $10,000 in each fund to get that. In our case, that would be $10k in each of these 3 funds.

For that to work, you’d need at least $70,000 invested to make the $10k minimum in the smallest investment (the bond fund). If you’re investing a lower amount than $70k with Vanguard to get this same allocation, you’d be using Investor shares. The weighted fee of that allocation is actually 0.156% – roughly the same as the target retirement date fund was.

In other words, with Vanguard, it only makes sense to break out of a target-retirement date fund on Vanguard once you have more than $70,000 invested.

A Fidelity Comparison

The Fidelity target-retirement fund has a fee of 0.75%, which is quite a bit higher than Vanguards. The list of holdings for this fund is too long to fit in a screenshot. There are 14 US Market funds, 5 international funds, 8 bond funds and 2 short-term funds (cash). Compared to Vanguards 4 funds, these 30 seems a little crazy.

Why does Fidelity do this? I don’t know for sure. Maybe the complexity looks better to a potential buyer, maybe in their models, it performs better, maybe it spreads funds around more to their different fund managers. Either way, it’s not needed if all you want is diversification. What really matters is their high-level table which shows how much they’re investing in US funds, international funds, and bonds. Luckily this one is a lot easier to read.


Fidelity Target Date Asset Allocation

Looking at the year 2040, it’s clear that 64% is in US funds, 27% in international and 10% in bonds. This isn’t far off from Vanguards allocation.

If you were to recreate this fund in Fidelity, you’d have two choices – either try to recreate all 30 funds that are in the target retirement fund, or just recreate it with one fund from each of the 3 major groups. For fees and sanity sake, I’d recommend breaking it down into just three. Here’s what that would look like:

FundExpense RatioPercent of 2040 Fund
Fidelity® Total Market Index Premium (FSTVX)0.035%63%
Fidelity® Total Intl Index Premium (FTIPX)0.1%27%
Fidelity® US Bond Index Premium (FSITX)0.045%10%

The weighted average of these would be 0.053% – a full percent lower than Vanguard even! Why then is their target date fund almost 15x higher than this, while Vanguards Target Date fund roughly the exact same price?

Why is Fidelity Cheaper?

The reason for that is because Fidelity needs to make money and Vanguard doesn’t. No really. Fidelity is a privately held company, while Vanguard is owned by their shareholders (the people who invest in Vanguard funds). Fidelity isn’t alone in this – all of the other companies on the list above use that similar model. They tend to offer a few funds that are super cheap – even cheaper than Vanguard. This allows them to say “Fidelity has cheaper funds than Vanguard” and it’s actually completely true.

What’s left unsaid is that if you choose funds outside of this list at Fidelity, they’ll be higher priced much higher than Vanguard.

Depending on where you’re investing, you’ll (hopefully) have some cheap options to choose from. I’d recommend finding this similar list of “cheap” funds at wherever you’re investing (in your 401k for example) and stick to using them.


The difference between Vanguard and one of the other places isn’t night and day if you stick within these boundaries. I wouldn’t jump from Vanguard to another company for a 0.005% gain. The easiest thing to do is see if where you’re investing offers some low-fee funds and stick to those.

If you’re investing through a company 401k and they don’t offer at least 1 low-cost index fund in each of the major areas (US, International, and bonds), then that’s a good conversation to have with your internal rep about getting them added. Find who made that decision in your company and help educate them on how much this decision is costing every single person at the company. If you can save everyone 0.5% every year, that’s a battle worth taking on.


  1. Pretty cool Adam, I like the approach. I have a Target Retirement Fund in my government TSP and the fee is super-low, so I use it. But this is a great way to make your own if yours has higher fees.

  2. Something to note is that you’re looking comparing the Vanguard Target Date index funds (technically funds of index funds) to actively managed target date funds from other providers. Fidelity also offers Fidelity Freedom Index funds with an expense ratio of 0.15% (FBIFX for the 2040 version). Schwab offers an index version with expense ratios of 0.08% (SWYGX for the 2040 version).

    At the end of the day, at least in a 401(k), you’re stuck with whatever is offered in your plan, so when your plan offers cheap individual funds, but expensive target date funds, going the DIY route is a great idea.

    It can also make sense to use this DIY approach if you have investments in non-tax-advantaged accounts, because that allows you to achieve your desired asset allocation across accounts while keeping things in best place based on the tax characteristics of the investment. For example, keeping bond funds (the interest on which is taxed at your ordinary income tax rate) in tax advantaged accounts, and stock funds (which have qualified dividends and long term capital gains taxed at capital gains rates, although non-qualified dividends and short term capital gains are taxed at ordinary rates) in a taxable brokerage account.

    1. This is a great catch! When I was looking in my own 401k looks like FFFFX is the only option, but for others they might have FBIFX – which is a solid choice. Good to hear that there’s a low-cost equivalent, despite the fact I don’t have access to it.

      You hit the nail on the head with the tax efficient fund placement comment. That’s a huge reason to potentially not use a target retirement date fund.

  3. I love this concept Adam. For somebody investing in the target date funds, this is like getting a free lunch. I do it myself. The one key item to note is that you must reallocate funds back to the appropriate allocation on a regular basis. The advantage to a target date fund is that you can put the money in and never think about it again. You can’t do the same with a reconstructed approach.

  4. That’s a neat approach to try to keep mutual fund fees down. I’ve historically been a fan of target date funds, but more recently I have become more sensitive to their higher fees (when compared to index funds). I never thought to look at the fund mix to try to replicate on my own.

    I actually have my 401(k) in VFORX and was pleasantly surprised that the fees are pretty low. Interestingly, the 401(k) account is with Fidelity but they offer Vanguard target date funds.

  5. I’ve always been curious when Vanguard rebalances their target date funds. I think the answer you get depends on who you talk to at Vanguard. We’ve been invested in Vanguard Target 2030 since 2011.

  6. There is a ton of good advice here. I have a Vanguard Target fund in my 403b with a 0.09 ER. I have even thought of trying to create a three fund portfolio in my 403b to get a lower fee. With the choices I have in my account I can only get to a 0.07. So for 2 basis points, I have just stuck with the target fund. But for your example with saving 70 basis points, that is like a 911 emergency, should have gone to a 3-fund portfolio yesterday kind of problem.

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