Title

Importance of costs in target date fund selection using three morningstar ratings

Abstract

Although target date mutual funds (TDFs) have only been around since the mid-1990s, they are now common vehicles for retirement investing. Sixty percent of US companies now automatically funnel employees' non-directed retirement funds into TDFs, which account for nearly one-quarter of all savings US workers have in 401(k)s. Helping investors pick among TDFs, Morningstar rates past risk-adjusted performance using a star system and provides forward-looking evaluations of more than 2,500 TDFs using either Analyst Ratings or a newly implemented machine-learning-based Quantitative Ratings. Morningstar assigns Analyst Ratings to a smaller subset of TDFs that tend to have been in existence the longest and have the largest size. We find that TDFs with lower fees have significantly higher star ratings than their higher expense counterparts. No-load TDFs have significantly higher star ratings than their load-charging counterparts. In assessing future fund prospects, TDFs with low expense ratios are favored by both analysts and artificial intelligence. TDFs without load charges have significantly better Quantitative Ratings than their load charging counterparts. TDFs with Quantitative Ratings tend to be smaller, younger, and have poorer prior performance than TDFs with Analyst Ratings.

Department(s)

Finance and General Business

Document Type

Article

DOI

https://doi.org/10.3905/jor.2021.1.085

Keywords

Information providers/credit ratings*, Long-term/retirement investing, Mutual funds/passive investing/indexing

Publication Date

1-1-2021

Journal Title

Journal of Retirement

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