Target Date Funds for Impact Investors

What are target-date funds?

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A target-date fund is a financial product that is professionally managed for those planning to retire in a given year. For example, the Vanguard Target Retirement Fund 2045 (VTIVX) is for investors retiring in 2045. The fund starts out investing aggressively and become more and more conservative as the retirement date nears.

Even though a target-date fund is represented by a single ticker (such as VTIVX), it is well-diversified and comprised of a variety of underlying holdings. In the example of VTIVX, here are the four underlying holdings.

  • Vanguard Total Stock Market Index Fund

  • Vanguard Total International Stock Index Fund

  • Vanguard Total Bond Market II Index Fund

  • Vanguard Total International Bond Index Fund

Target-date funds fill a need.

Target-date funds are a “set-it and forget it” option for people that don’t know how to invest and don’t have the time to learn about it. These funds eliminate the need for the investor to pick funds and rebalance on a periodic basis, hopefully encouraging more savings.

As much as I support target-date funds as a concept, not all target date funds are created equal. If you compare 2 target-date funds from different investment firms, you will likely find that they have different allocations, different costs, and different management styles. As a passive, low-cost, index investor, the Vanguard Target Retirement Funds are one of my top choices for clients.

ESG-focused target-date funds are now available.

With 42% of institutional investors incorporating ESG factors into investment decisions, it was only a matter of time until ESG target-date funds hit the market. There are currently two (2) target-date funds that meet Morningstar’s criteria of being a target-date fund and sustainable investment (Morningstar defined: “Sustainable Investment - Overall”).

Natixis Sustainable Future Funds

  • Established - 2/28/17

  • Net expense ratio - .59%

  • Total assets - about $5M

  • Investment Strategy - Active

  • Example portfolio - NSFJX (2045 Target Year)

This fund is higher cost and actively managed.

Blackrock LifePath ESG Index

  • Established - 08/18/2020

  • Net expense ratio - .25%

  • Total assets - about $2M

  • Investment Strategy - Passive

  • Example portfolio - LEHIX (2045 Target Year)

This fund is lower cost and passively managed.

Both of these funds are very new, which is why they have a small amount of assets. In comparison, VTIVX has about $29B in assets as of 10/31/2020. Most 401k plan providers and pension fund managers cannot invest in funds until they have a 3 or 5 year track record, so you likely won’t see either of these 2 options within your 401k plan any time soon. Even though LEHIX has been around for a few months, the underlying holdings have been around for 2 - 25 years. Here is a comparison between VTIVX and LEHIX as of 10/31/2020.

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LEHIX Holdings.png

The overall allocation is similar, but LEHIX substitutes ESG ETFs where possible. Here are some other comparisons to note:

  • The Vanguard and PWR models (the impact investing models for the financial & tax planning firm I run - Planning Within Reach) include international bonds. The Blackrock LifePath ESG Index Funds do not include international bonds.

  • The Blackrock, Vanguard, and PWR models include TIPS (only for those closer to retirement for Vanguard and PWR). They all use a non-ESG fund because there are no ESG TIPS funds.

  • The Blackrock and PWR models include REITs. They both use a non-ESG REIT fund.

I haven’t recommended either of the above target-date funds to clients yet, but plan to continue my due diligence and monitor the Blackrock LifePath ESG Indexes, in particular, to see if they would be a good fit for clients that can invest in target date funds.

Target-date funds are not always the best solution.

Target-date funds incorporate bonds, which are not tax-efficient. If you have money in taxable or brokerage accounts, a target-date fund is not the best option. It is preferred to place the stocks in the taxable accounts and the bonds in the retirement accounts.

ESG-focused target-date funds are just getting started. We will continue watching as more of these products come on the market and existing ones grow and have longer track records. Until then, you can still invest in the future economy by using individual funds and ETFs. Seek out an advisor that focuses on impact investing to help you get started.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.

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