302
Target-Date Fund vs Three-Fund Portfolio
Your balance, your contributions, both expense ratios — the fee math and the verdict.
X VS Y COMPARISON · MONEY · INVESTING
Target-Date Fund vs Three-Fund Portfolio: Which Wins After Fees?
One fund that runs itself, or three funds you run yourself — that’s the whole debate. The target-date fund rebalances and de-risks automatically, for a fee like Vanguard’s 0.08%. The three-fund portfolio (total US stock + total international stock + total bond) does the same job with your hands on the wheel, for a blended ~0.04%. At the defaults — $50,000 starting, $500 a month, 30 years, 8% gross return — the three-fund portfolio finishes at $1,279,463.50 and the target-date fund at $1,267,092.53: a $12,370.97 fee gap, but only 0.97% of the ending balance — inside our near-tie band. The fee math is the easy part; the automation question decides it. Enter your numbers — including your plan’s actual expense ratios.
How the fee math works
Both sides get the same starting balance, the same monthly contributions, and the same gross return. The only difference is the fee drag. Each month the portfolio grows at (gross return − expense ratio) ÷ 12, compounded monthly:
| Side | Expense ratio | Net monthly rate |
|---|---|---|
| Target-date fund | 0.08% | (8 − 0.08)% ÷ 12 = 0.6600% |
| Three-fund portfolio | 0.04% | (8 − 0.04)% ÷ 12 = 0.6633% |
Four hundredths of a point a month doesn’t sound like much — that’s exactly the point. Fees are a slow leak, not a burst pipe. The calculator compounds it over your whole horizon and shows the dollar damage.
The worked example: $12,370.97, line by line
$50,000 starting balance, $500 a month, 30 years (360 months), 8% gross return:
Target-date fund: net rate 0.6600%/mo. $50,000 × 1.0066360 + $500 × ((1.0066360 − 1) ÷ 0.0066) = $1,267,092.53. The fee drag — what the 0.08% cost you versus a fee-free world — is $24,873.67.
Three-fund portfolio: net rate 0.6633%/mo. Same math with the 0.04% drag = $1,279,463.50, with a fee drag of only $12,502.71.
The gap: the three-fund portfolio wins the fee math by $12,370.97 — but that’s 0.97% of the ending balance, inside our 1% near-tie band. Over thirty years, the difference between Vanguard’s own two options is a rounding error with six figures attached. Now flip the expense ratios — an active target-date fund at 0.68% against the same 0.04% three-fund — and the gap explodes to $183,066.12. The fee level matters more than the fund format.
Output · formula · meaning
| Output | Formula | What it means |
|---|---|---|
| Target-date after-fee value | FV at (gross − TDF ER) | $1,267,092.53 at the defaults — one fund, fully automatic. |
| Three-fund after-fee value | FV at (gross − 3-fund ER) | $1,279,463.50 at the defaults — DIY, same job. |
| Fee gap | three-fund FV − TDF FV | $12,370.97 at the defaults — the price of automation. |
| Fee drag (each side) | gross FV (0% ER) − after-fee FV | $24,873.67 vs $12,502.71 at the defaults. |
| Break-even target-date ER | the TDF ER where both finish tied | 0.04% at the defaults — equal to the three-fund’s ER. |
Who uses this
- 401(k) participants with a target-date default: seeing what the convenience costs versus rebuilding the mix from the plan’s index funds.
- DIY investors: quantifying the payback for annual rebalancing — and whether their plan’s index funds are cheap enough to bother.
- Anyone offered an active target-date fund: the 0.68%-style fee is where the gap turns from rounding error into a five-figure bill.
- Advisors & educators: the near-tie band makes the behavioral argument concrete — cite it with the block below.
Accuracy & limitations
Models identical gross returns for both sides — it isolates the fee effect; it does not model glide-path differences (the TDF de-risks over time while the three-fund holds your allocation) or tracking differences between specific funds. Contributions are monthly and constant; real contribution paths vary. Expense ratios are assumed constant; funds change them. Taxes are not modeled (both sides are assumed in the same account type). Not investment advice.
Cite this calculatorBright Side Kit. “Target-Date Fund vs Three-Fund Portfolio: Which Wins After Fees?.” brightoolbox.com, 2026.
Bright Side Kit. "Target-Date Fund vs Three-Fund Portfolio: Which Wins After Fees?." https://brightoolbox.com/target-date-fund-vs-three-fund-portfolio/ Accessed October 23, 2026.Frequently asked questions
Is the three-fund portfolio always cheaper?
On paper, almost always — but the size of the win depends entirely on the fee level, not the format. At Vanguard’s own funds (0.08% TDF vs ~0.04% three-fund) the 30-year gap is $12,370.97 — inside the near-tie band. But an active target-date fund at 0.68% against the same 0.04% three-fund loses by $183,066.12. And if your 401(k)’s index funds are pricier than its target-date fund (the inversion branch), the TDF wins outright. Check your plan’s actual numbers.
What does an expense ratio actually cost me in dollars?
The Bogleheads rule of thumb: every basis point costs $1 per $10,000 invested, per year — and it compounds. 0.60% on a $500,000 balance is $3,000 a year, every year, forever. That’s why the calculator shows fee drag as a dollar figure: percentages hide the damage, dollars don’t.
Can I hold a target-date fund AND other funds in the same account?
Don’t. A target-date fund is a complete portfolio with its own glide path — adding funds beside it undoes the mix the managers built, usually by overweighting whatever’s hot. One fund is the strategy; two funds is a different strategy you didn’t design.
What exactly is the glide path?
The fund’s automatic de-risking schedule: heavy in stocks when you’re young (often ~90%), gliding toward bonds as the target year approaches (often ~50/50 at retirement). It’s the automation you’re paying for — a three-fund investor does the same thing by hand, once a year, by shifting the bond sleeve.
Who should pick the three-fund portfolio?
Investors who will actually rebalance once a year and not panic-sell in a crash. The fee math assumes mechanical discipline; the behavioral leak — skipping rebalances, selling low — costs far more than 0.04%. Be honest about which investor you are: the best portfolio is the one you’ll hold through a 30% drawdown.
My 401(k) index funds are expensive. Now what?
Take the target-date fund — that’s the inversion branch. If the cheapest three-fund ingredients in your plan cost as much as or more than the TDF, the DIY portfolio wins nothing and costs you the automation. Fee level beats format, every time.