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Do target date funds handle dividends & CG's differently than mutual funds?
Old 06-02-2023, 10:59 AM   #1
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Do target date funds handle dividends & CG's differently than mutual funds?

I was looking at DD's 401K. Her contributions and the company match go into the Morgan Stanley Smart Retirement 2055 target date fund at the recommendation of her HR department. They have a special class with a lower expense ratio than the on-line listed, but it is still over 0.25%. It is a fund-of-funds, containing 21 funds plus a small amount of cash.

The part I don't understand is where the dividends & CG's go. All the transactions are correct for her contributions & the company match, but in over 3 years there have been no dividend or CG additions to the balance.

Do TDF's simply put the earnings into the share price (reinvest in the underlying funds)? Or is there another reason none are showing up? The online descriptions from Morgan Stanley show some healthy CG's over the past two years but I can't see where this money has gone.

I'm thinking of talking to her about just switching the balance & future contributions to the S&P500 fund they offer - lower fees and clearer accounting. She is just 30 years old so she has a long time to ride out market volatility and the 35% the TDF holds in foreign stocks seems very high to me.

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Old 06-02-2023, 11:17 AM   #2
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It's not the fact that it's a target date fund. It's the fact that it's in her 401(k) and the name of the investment inside the 401(k) is probably similar to an actual mutual fund.

If you (or better she) digs, you or she will probably find that it is a unit investment trust (UIT). That UIT is *not* the similarly named mutual fund, but is a different investment container into which 401(k) participants defer their pay and which then turns around and buys and holds shares of the actual mutual fund.

The dividends and CGs from the underlying fund, as you have guessed, almost certainly are paid from the mutual fund to the UIT, which turns around and buys more shares of the mutual fund with it. This should show up as investment performance by an increase in the share price of the UIT.

You might notice that the UIT share price (as reflected on the 401(k) statement or website) doesn't match the underlying mutual fund share price.

The UIT might have it's own layer of fees, BTW.

A target date fund is just a type of mutual fund, BTW.

If the target date fund is indeed a fund-of-funds, then you'll have three layers: UIT owns fund-of-funds which owns funds. Probably fees at each layer.

The S&P500 fund might also be a UIT and have the same issue. Or it may actually be an S&P500 mutual fund and give you the accounting you would like. It will very likely have lower fees just by being an index fund.

A bigger deciding factor in my mind would be whether or not she wants the investment profile of the S&P500 or the target date fund. Over the next 32 years, that target date fund is going to shift more to bonds and cash; the S&P500 won't. Either can work, it's just a matter of her goals and investment preferences and volatility tolerance.
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Old 06-02-2023, 11:53 AM   #3
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I agree with SecondCor521. These type of investments are becoming very popular in 401(k)s. They are similar to the investment, but not the same. They rarely pay a dividend. Instead the investment just adds it to the growth. For this reason, the fund won't have a stock ticker that can be easily tracked. You can't use the similar fund ticker to track it because the handling is different.

On one hand, they are a good thing, because they typically offer a lower expense ratio. However, they do take some of the fun out of watching your investments. You can't easily track them accurately in Quicken, for example. And you miss the fun of seeing quarterly "free money" being added to your holding.

But probably nothing to worry about as long as the objectives of the investment match up to the needs of your daughter.
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Old 06-02-2023, 01:04 PM   #4
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Thanks for the description, SecondCor. Because of the special class it isn't easy to find information on how the fund is structured. The only information is the very brief prospectus that her employer has on their website.

The transactions show as "share purchase" i.e. "11.29014 shares @ $17.99092 = $203.12" on 5/31. Morgan Stanley's website lists a NAV of $21.24 as of 6/01. Could this be the difference between the actual share price and the UIT's share price?

We logged in to her online account system it shows the account value matching our records at $18.06 share price not the $21.24 NAV today. Does that sound right to you, that the value equals the total of contributions & matches - not - the NAV??

Paunchy, I agree with what you say about not tracking well in Quicken. I have a separate Quicken file for DD and tracking this account isn't easy. It's kind of like a black box that money goes in and hopefully more money comes out.

One feature stands out: it has greatly underperformed the S&P for one, three, and five year periods. Her other investments are so much easier to follow and understand.

I know TDF's are popular in 401k accounts, but multiple layers of fees, lack of transparency, and relatively poor performance make me question whether this is a solution for people who don't look very closely at their accounts.

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Old 06-02-2023, 04:39 PM   #5
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Quote:
Originally Posted by BrianB View Post
Thanks for the description, SecondCor. Because of the special class it isn't easy to find information on how the fund is structured. The only information is the very brief prospectus that her employer has on their website.
Yeah, that was my experience too.

Quote:
Originally Posted by BrianB View Post
The transactions show as "share purchase" i.e. "11.29014 shares @ $17.99092 = $203.12" on 5/31. Morgan Stanley's website lists a NAV of $21.24 as of 6/01. Could this be the difference between the actual share price and the UIT's share price?
That sounds exactly right to me. The $17.99 is very likely the UIT price, the $21.24 is the MF price.

Quote:
Originally Posted by BrianB View Post
We logged in to her online account system it shows the account value matching our records at $18.06 share price not the $21.24 NAV today. Does that sound right to you, that the value equals the total of contributions & matches - not - the NAV??
I'm less sure of what exactly you're describing here. The $18.06 is close enough to the $17.99 price that it probably represents a price for the UIT. The market has gone up the last two days, so if I had to guess I'd say the $18.06 is the UIT closing price as of today (or maybe as of yesterday).

For most days, I would expect the prices of the UIT and the MF NAV to go up and down proportionately - so if the MF goes up 1% in a given day, the UIT price should also go up 1% that same day.

On days where there are distributions in the MF, I wouldn't be surprised to see a temporary dislocation between the two.

And there will also be rounding issues. Since the share prices are low and are rounded to the nearest penny, you might see the MF go up 0.98% and the UIT go up 1.03% or something like that.

There may also be reporting delays, so you might find a pattern where the MF goes up 1.03% on Monday and the UIT goes up 1.02% on Tuesday because of a day delay in the price reporting that has to get propagated from the MF to her 401(k) website.

But yes, overall, the NAV of the MF and the UIT price are never going to match each other on an absolute dollar value (so $18.06 != $21.24), and that's OK. It's like you have two large pepperoni pizzas and one is cut into 7 pieces and one is cut into 6 pieces. Pies are the same size, but the pieces are not.

None of that would bother me personally, but I can see how it might bother someone else. You might be bothered less if you tracked the UIT price against the MF price for a while and see them move in lockstep. If you do that long enough, you can track it through a MF distribution and see how and when that shows up in the UIT price. I would guess that the UIT price would go up proportional to the distribution per share divided by the share price, but it's been a long while since I dealt with one in my 401(k) and I think I was just trusting that they were doing the right thing so didn't pursue it to the level you are.

I also didn't like having the UIT in my 401(k) because Quicken couldn't track it as well. I just ended up tracking it manually - paycheck goes in, buys X shares, match goes in, buys Y shares. Then update the UIT price periodically and the account value should then be correct - for a day at least. I have to do the same thing with my kids' 529 plans.
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Old 06-02-2023, 05:00 PM   #6
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Originally Posted by PaunchyPirate View Post
... On one hand, they are a good thing, because they typically offer a lower expense ratio. ...
When looking for the expense ratio of any fund that holds other funds, one must include the expense charges of those other funds. Doing this carefully may reveal that the expense ratio that the customer is paying is in fact quite high. I have no idea, though, whether this is an issue with the fund the OP is looking at.
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Old 06-02-2023, 06:15 PM   #7
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I went through this with my 401k plan a year or so ago. After far too much time spent on it, I finally talked to someone knowledgeable enough to answer my question. That answer mimicks what others have said above. There are dividends, but you'll never be able to track them because they are built into the "share" price of the fund. I don't trust anything I can't calculate or see myself, so I've always been curious how much the 401k owner is getting screwed over in this type of setup, but after talking to numerous friends, its pretty common.
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