Target-Date Fund vs. DIY Portfolio Cost
Example: Current retirement balance: 30000 $ · Annual contribution: 6000 $ · Gross annual return: 7 % · Target-date fund expense ratio: 0.15 % · DIY three-fund expense ratio: 0.04 % · Years to retirement: 30 years
| DIY advantage over 30 years | $17,870 |
| DIY three-fund final balance | $788,523 |
| Target-date fund final balance | $770,653 |
| Advantage equals this many years of contributions | 2.98 |
Worked example
Starting with $30,000 and adding $6,000 per year for 30 years at 7% gross: a Vanguard target-date fund at 0.15% ER grows to $720,000. The equivalent DIY three-fund portfolio at 0.04% ER grows to $741,000 — a $21,000 DIY advantage, equal to roughly 3.5 years of contributions. Both are excellent choices; the question is whether you will actually maintain the DIY rebalancing.
Frequently asked questions
What is a three-fund portfolio?
A three-fund portfolio holds three low-cost index funds covering U.S. stocks (e.g., VTSAX), international stocks (e.g., VXUS), and bonds (e.g., VBTLX). It gives global diversification with minimal cost and requires annual rebalancing. Many Vanguard, Fidelity, and Schwab index funds in this configuration have expense ratios of 0.03%–0.05%.
Is the target-date fee gap always this small?
It varies significantly. Vanguard target-date funds charge 0.10%–0.15%, among the lowest. Many 401k plans offer target-date funds from third-party providers at 0.50%–0.75%, and some employer plans restrict fund choices. At 0.75% vs. 0.04%, the 30-year gap in the same scenario would be over $80,000. Always check the expense ratio of the funds actually available in your plan.
Should I pick target-date or DIY?
Varies by your plan's fund options and discipline. If your plan's target-date fund is low-cost (under 0.20%) and you know you will not rebalance a DIY portfolio consistently, the target-date fund may produce better actual outcomes despite the slightly higher fee. If you are disciplined and your plan offers cheap index funds, the three-fund approach wins on cost. The worst outcome is a high-fee target-date fund when cheap index funds are available.