When does a TDF cost too much?
My 401k has lackluster options.
- The only index fund is an S&P500 fund from Vanguard, with a 0.05 ER. This is great! Unfortunately, there are no index options for small or mid-cap, only actively managed funds with ERs of 0.4 and higher.
- My only TDF is an actively managed fund with a 0.44 ER. Not so great. No index options here.
- The only bond fund is at 0.39 ER (not bad for an actively managed bond fund).
- The only international funds are also actively managed, with an ER 0.60. or higher
I would very much prefer a set-it-and-forget-it method of a Target Date Fund. The TDF in my 401k includes bonds and international exposure, which I want. I also value the automatic balancing and glide path of a TDF.
The question I am trying to weigh is: when does the personal preference for a TDF outweigh the increased expense?
I could put all of my money in the S&P500 fund. I'm about 15 years from retirement, so having my 401k 100% still reasonable, but I would lack the international, other domestic, or bond exposure I would prefer.
However, adding international exposure or bond exposure with one of the other fund choices would seem to dilute the savings of using the lower ER of the S&P500 fund. For example, by the time I added 30% of my equity position weighted toward international and maybe 10% of the total portfolio in bonds, about 37% of the 401k is comprised of funds with ERs similar ot higher than the TDF! The total average ER would still be lower, but nowhere near the 0.05 of the S&P500 fund.
How much of a premium would you pay on a TDF compared to a diy three-ish fund approach? If I were saving 1% in fees, I'd absolutely cobble something else together. But if I were saving only 0.2% or 0.3%? Does the convenience of having one fund ever outweigh the increased cost?