401(k) · Fees

DIY Target Date Fund

For most of my peers, digging through 401(k) investment literature and understanding the different options is not exciting and even a little scary.  Few make it a hobby like I do.

I can sympathize with the allure of a “target date” fund.  The chief advantage of target date funds is their simplicity.  Simply specify the date you want to retire and that’s it.  Target date funds can also give a wider exposure to unusual markets.  Many employers agree with the advantages and automatically enrolling new employees into the target date fund that most closely aligns with the year the employee will be 65.

On the other hand, target date funds layer additional fees on top of the underlying investment options.  They are one-size-fits-all and aren’t tailored to individual situations.  Target date funds can be more risk averse than is necessary for a given individual, leading to less money to retire with.

Is it possible to “do-it-yourself” (DIY) your own target date fund, combining super-simplicity and customizability, without the baggage of higher fees and risk aversion?

Buying a Target Date Fund

Let’s take at the popular target date funds from Vanguard.  The Vanguard funds are publicly available and come with low fees.  In general, these funds are a mix of three components: US stock, international stock, and bonds.  As retirement approaches, the mix shifts from stock towards the relatively safer bonds, including treasuries.

Here’s a graph of the current allocations across Vanguard’s target retirement funds:

You’ll notice that in the early years, roughly 90% of money is invested in stocks and only 10% in bonds.  The young investor has more time until retirement and can last the inevitable market turbulence.  When retiring at 65, as safety becomes more important than return, the retiree is still 50% in stocks, with two-fifths placed in international stocks.

The fees behind Vanguard’s target date funds are very modest, ranging from .12% to .15%.  If you weight the fees of the underlying funds (VTSMX, VGTSX, VTBIX, VTIBX) by their mix in the target date fund, you get the same range.  Vanguard doesn’t appear to be layering anything more than a negligible fee, if anything, into their target date funds.

DIY Vanguard Target Date Fund

All of the funds used in Vanguard’s target date funds have Admiral shares equivalents: VTSAX, VTIAX, VBTLX, and VTABX, respectively.  I could build my own target date fund by buying those funds instead with the same allocation.  I would log in one time each year and rebalance between the funds to align with Vanguard’s target date funds. Easy peasy.

What about customizability?  Let’s say I had a pension or annuity, making my overall financial picture skewed towards income generating. I could shift my allocations from VBTLX towards VTSAX and VTIAX, customizing my DIY solution to my personal situation.

What about I’m worried about being too conservative? Again, I could shift my allocations more towards VTSAX and VTIAX.

By building my own target date allocation, I would cut my fees in half, saving on average .07%/year. That seems like a minuscule number, but it adds up over a 40 year career. Assuming I’m doing this in a self-employed 401(k), that I maxed out my contributions between age 25 and 67, and that I have an after-inflation 3% annual return, by age 67 my account balance will be $29,413 less if I use Vanguard’s target date funds.  That’s 1.77% of the total $1.7 million, or an average of $700 per year!  All for logging in once a year and a few clicks.


For some people, even logging in once per year and rebalancing their balances to align to Vanguard’s target date funds is too much.  The appeal of someone else taking care of it outweighs optimizing things.  Even though their suboptimal, Vanguard’s target date funds aren’t horrible and would be a fine option.

Do you use target date funds?  I’d love to hear about your experience in the comments.

Hasta luego!

2 thoughts on “DIY Target Date Fund

  1. I feel like a started with a fidelity target-date fund when I first started working and didn’t completely know what I was doing. I then shifted to VTSAX mostly for the lower fees. I do need to tighten up my allocation strategy and write it down in an “investor policy statement”. The hospital I work for now runs everything through Lincoln Financial but they access Vanguard.

    I know fees add up over the years, but I figured the vanguard target-date fund fees would be immaterial compared to a DIY set up. Never thought it would come close to 30k though! Mrs. Max OOP just got her part-time teaching contract for next year and it came to about that for 10 months of work (0.6 FTE)!

    What field do you work in? Sorry if I overlooked it somewhere on here.

    Happy Friday.


    1. Thanks for the comment. When it comes to target date funds, Vanguard has some of the ones with lowest fees. I actually started this post by looking at my current work’s 401(k) target date fund options and they have incredibly (to me) high fees of .29%. But my post got too long so I broke it up with this post first highlighting a reasonable benchmark before dissing on my current 401(k) options.

      I’m a software engineer, mostly doing full-stack engineering. I keep meaning to come up with a meaningful “about me” page but just never getting around to it.

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