Target-date funds a solution
About 90 percent of target-date funds are "funds
of funds," meaning they contain other mutual funds. For instance,
Target Retirement series contain the low-cost index funds for
which Vanguard is famous. The Fidelity
Freedom funds and T.
Rowe Price Retirement series contain actively managed funds
run by their own firms. Principal
Investors LifeTime funds contain a mix of their own house funds
as well as funds from other firms. Unlike most target funds, Barclays
Global Investors LifePath funds are not composed of other funds
but rather are run by portfolio managers as individual funds.
Asset allocation strategies can vary quite a bit
among these funds. T. Rowe Price has a reputation for offering the most aggressive
mix. Its philosophy: Investors need more stock exposure to offset such risks as
inflation and longevity. Even its Retirement 2010 fund, appropriate for those
who face imminent retirement, has a 63 percent weighting in equities, compared
to less than 50 percent for most other funds with that target date.
stock holdings can vary substantially among funds with the same target date as
well. For example, John
Hancock 2 Lifecycle 2040 invests a third of its assets in foreign stocks,
while Vanguard Target Retirement 2040 has less than 18 percent invested in stocks
outside the U.S. The same holds true with riskier small-cap stocks; some funds
have higher stakes than others. You can research holdings at the sites of the
individual fund firms or go to Morningstar to learn specifics.
Which funds does Morningstar favor?
target-date fund series we like the best are from Vanguard for their low costs
-- and you're getting broad diversification," Carlson says. "T. Rowe
Price is our other favorite series. That's because their funds are actively managed,
but they're pretty reasonably priced and they tend to do a lot of things well,"
he says. As an example, they include most of their best-performing funds in the
Why not cite the omnipresent Fidelity
Freedom funds, which command about 50 percent of the market?
Freedom funds tend to include some of their more mediocre offerings," says
Carlson. Many of the Freedom funds contain a couple of dozen funds, he adds. "They
end up with a lot of overlap." For instance, you might see three large-cap
growth funds in a single target retirement fund, he says.
should be the biggest factor in your decision to buy into a target retirement
fund. Another factor to consider is its asset allocation -- does it match your
risk tolerance? Is it too tame or too wild for your liking? Do you need to supplement
your portfolio with a high-yield bond fund or another small-cap fund to rev it
up a bit?
If you're a fund fanatic, choosing a target-date
fund may not be enough of a challenge for you. It's just too easy. But if you're
like most people who'd rather not be bothered with trying to figure out your portfolio's
optimal asset allocation, let alone which funds might do the best job of helping
you meet your goals, target-date funds can be an excellent solution for your retirement
On the next page is a listing of some of the more
popular target-date funds as well as their asset allocation characteristics, according