Robo-Advisor Vs Target Date Fund: Which Do You Need?

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The decision to save tons of money today for a retirement that is years away is a big ask. But that’s the easy part of the job—much more challenging is deciding how to invest the money.

“Most people don’t want to be their own financial advisor,” says Stan Milovancev, executive vice president at CBIZ Retirement Plan Services. “Even if they are willing, they need to be able to understand investing theory and have the stomach to stick with it.”

Both target date funds and robo-advisors offer easy solutions to this dilemma. But how do you determine which one is right for you?

What Is a Robo-Advisor?

As the name implies, a robo-advisor is an automated investment advisor. After it asks you a bunch of questions about your financial life and your investing goals, its algorithm spits out a recommended mix of investments.

This asset allocation is generally made up of low-cost exchange-traded funds, or ETFs, which contain hundreds or thousands of individual stocks or bonds. This provides easy diversification of your investing dollars and is in line with what most financial advisors recommend for long-term retirement investing success.

Of course, these investments and their upkeep aren’t free. There are typically two fees you pay when you invest through a robo-advisor.

Most robo advisors charge what’s called an advisory fee for managing your account. A recent survey of 17 robo-advisors pegged the average annual fee at 0.30%.

Then there’s the annual expense ratio charged by the investments the robo-advisor puts you in. The lowest-cost ETFs and index mutual funds can have expense ratios below 0.10% or so. This means your overall cost to invest through a robo-advisor can generally work out to be less than 0.50% of the assets you hold each year.

What Is a Target Date Fund?

A target date fund is a lot like a robo-advisor in that it’s a one-stop-shopping solution to building an instant diversified portfolio.

While you’ll answer a questionnaire to determine your investments with a robo-advisor, target date funds are much simpler, providing the same diversified asset allocation strategy for everyone based on how many years they have until they reach retirement age.

When you’re young, a target date fund takes on a more aggressive strategy with a higher percentage of stock-based investments. But as you near retirement, it adjusts its holdings to become more conservative with its holdings so you’re less likely to wreck your retirement plans if something cataclysmic happens in the stock market.

Because it is one fund that holds many other funds, a target-date fund is known as a fund-of-funds in the investment world. In addition to the standard stock and bond funds, some target-date funds also invest in real estate and commodity funds.

As with robo-advisors, investors pay an annual expense ratio that reflects the fee charged by each of the underlying funds in the portfolio. According to Morningstar’s annual target-date report, the average asset-weighted expense ratio for target date funds is 0.52%. The lowest-cost target date funds have an average fee of 0.12%

Target Date Fund vs Robo-Advisor: Main Differences

While both approaches offer a streamlined approach to retirement investing, there are important differences to be aware of when considering robo-advisors and target-date funds.


A target date fund basically asks you one question: How old are you? The portfolio you’re guided into is the same portfolio everyone of a similar age will have, even though your financial situations could be quite different.

“A robo-advisor starts with your age and then asks a lot more questions, such as how much you already have saved and your income level,” says Milovancev. “A robo isn’t as personalized as working with a financial advisor, but it is much more personalized than investing in a target date fund.”

While target date funds are designed for retirement savings, a robo-advisor can also build portfolios to help you with other goals, such as saving for a home down payment or a kid’s college tuition. For those non-retirement savings you’ll use a regular investment account that lacks the tax benefits of a retirement account.

But because of this, many robo-advisors are able to offer a service called tax-loss harvesting that takes advantage of the fact that while you’re taxed on gains, you can write off losses. Over time, this may improve your investment returns in taxable accounts.

Investment Assets

Target date funds typically use mutual funds run by the same company. For instance, BlackRock target-date funds own BlackRock funds. Fidelity target-date funds own Fidelity mutual funds.

“That can be fine and good,” says Milovancev. “But they are only shopping at their own grocery store.”

Meanwhile, robo-advisors that are not affiliated with a fund company—such as Betterment and Wealthfront—have the freedom to seek out the best investment options for their client portfolios. This may help you get lower fees, more liquidity or even better prices on your investments.


Robo-advisors typically only use ETFs or index funds that attempt to track the performance of major indexes, like the S&P 500 or Nasdaq. Because there aren’t any regular decisions being made about what to invest in, this is called passive investing and stands in contrast to so-called active investing in which each investment is picked by a professional.

Some target date funds use actively managed funds, some are 100% committed to indexing like most robos and some even use a combo of both. Target date funds that use some amount of actively managed funds generally tend to have higher expense ratios than completely passively managed funds. This can cut into your investment returns over time.

Fees and Costs

A target date fund with a low expense ratio is typically going to cost you less than the all-in cost of a robo advisor, where you’re paying an advisory fee plus the expense ratio. That said, if you opt for a target-date fund that includes actively managed funds, you could find yourself paying an expense ratio that exceeds the all-in cost of a robo-advisor.

While you shouldn’t necessarily run the other direction from anything with a higher fee, do keep in mind that on average, actively managed funds’ performances have trailed those of passively managed index funds. This means you could wind up paying more for the same or worse performance.

Finally, when you’re researching robo-advisors, there’s one other important factor to be aware of when it comes to costs. Some robos will tell you there’s no advisory fee. But there’s typically an important asterisk you don’t want to miss.

Schwab’s robo offering, for instance, doesn’t charge an advisory fee, but the algorithm it uses to determine your asset allocation will always insist you hold some cash (it can range from 6% to 29% based on your investing goal) and that cash will be held at Schwab’s own bank. This means Schwab is free to loan out your money as it would any other money it held in savings accounts. This helps it pay for its “free” advisory services, but it can cost you in returns you miss because all of your money isn’t invested.

Other robos, like SoFi Automated Investing, meanwhile, cover the cost of their “free” services by investing you in some amount of proprietary funds that they own and that may have higher expense ratios than comparable investments over the long term.

The important thing to remember is there’s really no such thing as a free robo-advisor. Each brokerage ultimately has to charge enough to cover at least the cost of the service, even if these fees are hidden.

Investment Minimums

It’s hard to paint in broad strokes when it comes to the minimum you need to invest with either a target date fund or a robo-advisor. You can find platforms and products that require little or no money to get started, and others, like Personal Capital, that take more than $100,000.

That said, generally speaking, because most target date funds are mutual funds, they tend to have higher minimum investment requirements. It takes $1,000, for instance, to get started with a target date fund at low-fee leader Vanguard.

But no-minimum target date funds do exist. Schwab’s target-date funds, for example, have an investment minimum of $1 for retirement accounts, and you may be able skirt minimums at certain brokerages by agreeing to invest a set amount regularly.

Robo-advisors typically have lower initial hurdles: For example, Betterment has no initial minimum and Wealthfront’s is $500. But robos at traditional brokerages, like Vanguard and Schwab, may have minimums that exceed their target-date fund counterparts.

In short, when you’re deciding between saving for retirement with a target date fund or a robo-advisor, keep in mind that different products have different minimums that may affect your ability to invest right away. But with a little research, you should be able to find a robo or target date fund that meets your needs.

Target Date Fund vs Robo-Advisor: Which Should You Choose?

If you’re investing through a workplace retirement plan, the decision of whether to use a target-date fund or a robo-advisor is made for you: You’ll be stuck with whatever your plan has, and workplace plans almost always offer target-date funds, not robos.

But if you’re ready to do a 401(k) rollover, or want to build retirement savings in an individual retirement account (IRA), you can go with either approach to simplify your investing life.

If you’re OK with a perfectly usable (but cookie cutter) approach that may charge less in fees, opt for a target-date fund. If you are eager for an asset allocation that is more fine-tuned to some basic pieces of your personal financial life—savings, income, etc.—or you need to invest for something outside of retirement, a robo advisor is the way to go. And for a more bespoke approach than a robo, you’ll need to step up into the world of working with a financial advisor.

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