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Are you paying too much for your funds?

A fund's expense ratio can dramatically affect its performance. Here's an easy way to compare.

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By Walter Updegrave, Money Magazine senior editor

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

NEW YORK (Money) -- Question: What is a reasonable expense ratio for a target retirement fund? I'm considering one with annual expenses of 0.77% of assets, but I'm wondering whether I can do better. Where can I go to compare this fund's fees to those of similar funds? ?Laury, Montgomery, Alabama

Answer: Aside from her rakish Caesar-style hairdo, American avant-garde writer Gertrude Stein is probably best remembered for her line "A rose is a rose is a rose."

I have no idea whether this is really true of roses. But I can tell you it's not the case for target-date retirement funds.

In fact, while all target-date funds are similar in concept - that is, they give you a diversified mix of stocks and bonds that becomes more conservative as you age - they can differ widely in two ways that can dramatically affect their performance: the size of their fees and the extent to which they emphasize stocks in their portfolios.

So your instinct to see whether you can find another target fund that has expenses lower than 0.77% a year is a good one. And while you're checking that out, you might also pull back the curtain to compare the asset allocation strategies of different funds, taking special care to see how much the fund devotes to equities in the pre-retirement and retirement stages.


The easiest way to tell how the fund you're considering stacks up against other target-date funds is with Morningstar's Fund Screen tool.

You can select target-date funds by ranges of dates (2000-2010, 2011-2015, 2016-2020...2050+). Just pick the range that applies to you. Then, from the "Cost and Purchase" section, choose the expense hurdle that you want the funds to meet. Click on "Show Results" and boom! You immediately get a list of target funds in your date range with expenses at or below the category average.

The tool also lists the category average expense ratio for these funds, which is 1.27%. So already you know that the fund you're considering has below-average expenses. But how much better might you be able to do?

You can narrow down the results by changing the criteria. For example, you can include only funds that require a minimum initial investment of $10,000 or less, or exclude load funds - i.e., those that charge a sales commission.

You can whittle the list down more by screening for other criteria. But I don't think that would be particularly helpful for this type of fund.

Rather, at this point I suggest you switch to the "Nuts & Bolts" view. Among other things, you'll see each fund's expense ratio and minimum initial investment requirement, and you can sort by expense ratio. Do this, and you'll quickly see that there are indeed a handful of target-date funds with annual expenses below 0.77%.

Now, you should do a bit more legwork before you decide whether to buy any of these lower-cost funds. For one thing, you'll want to confirm that the expense figure you're looking at is accurate. Most target-date funds are funds of funds - that is, they spread their money among a combination of stock and bond mutual funds. So you pay a pro rata share of the expenses of each of the underlying funds in the target-date fund's portfolio. Some target funds may layer an additional management fee on top of the underlying fund fees.

Some fund companies may also temporarily waive a portion of their management fees. So you'll want to be sure that the expense figure you're looking at includes all the fund's annual fees and, if it includes a waiver, that it's not likely to ratchet up dramatically at some point in the future. To do that, you can speak with a fund rep and/or check the fund's prospectus, which is typically available on the fund's web site.

Asset allocation

Before you commit to a fund you'll also want to see how it divvies up its assets between stocks and bonds. Target-date funds with the same date but from different fund families sometimes have dramatically different exposure to equities. That's especially true of funds geared toward retirees and near retirees.

There's no level of stock exposure that's right for everyone. If you'll be collecting a pension and have lots of other assets to fall back on, then you can likely go with a higher equity stake at or near retirement than someone whose target-date fund represents the bulk of his or her retirement resources. Similarly, the level of stock holdings that's right for you depends on how rattled you get when your portfolio's value takes a dive.

What's most important, though, is that you understand what you're getting before you buy, and that you're comfortable with that stocks-bonds allocation. (If you like its fees, but feel the fund's mix is too aggressive, you can always go with a fund that has an earlier date - or a later date, if you feel the strategy is too conservative.)

Finally, all that I've said here assumes that you have a choice of which target-date fund to invest in. If you're investing within a 401(k), however, you probably have only one fund family's target-date funds to choose from.

But even in that case, it's still a good idea to go through the exercise I've outlined. If nothing else, you'll have a sense of whether you're paying a reasonable price for the target-date funds in your plan. And if you switch jobs or retire and decide to move your money out of your 401(k), you'll have a head start on choosing a new target-date fund. To top of page

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