Now that we’ve been fending for ourselves with respect to managing our own retirement plans for the past couple of decades, we’re all professional investors, right? We know exactly which funds to buy in our 401(k) plans and IRA accounts. We also know how much to allocate to the various stock and bond fund options.

Well, maybe not. The Employee Benefit Research Institute released a study that suggests we’re muddling through investment decisions, often taking stances that are way too conservative or, conversely, way too aggressive.

For instance, about one-fifth of investors in their 30s, 40s, 50s and up to age 64 have all their money invested in interest-earning assets. That’s too much exposure to fixed income, no matter how old or risk-intolerant investors are. At the other end of the risk spectrum, nearly one-third of investors in the same age range invest 100 percent of their money in equities. That may make sense for younger investors who have a long time horizon to retirement, but it’s a pretty risky bet for older investors.

Meanwhile, more than a quarter of investors have a mix of bonds and stocks — a good thing — but with less than 50 percent allocated to the latter, riskier asset class. Some would judge this to be too conservative for everyone but older investors.

These figures come from the Survey of Consumer Finances, a study conducted by the Federal Reserve Board once every three years.

One solution: target-date funds

Target-date, target-retirement or life-cycle funds, as they are interchangeably called, are becoming staple items in 401(k) plans these days. Some 30 fund firms offer them, and more are joining the fray, most recently BlackRock, American Funds and OppenheimerFunds. Some observers predict these funds will be the biggest money magnet in the industry over the next few years for several reasons.

How target-date funds work, why they’re popular:
  • Easy solution for investors with no time to research fund options in their retirement plans.
  • Investors choose the target date that coincides with the year in which they wish to retire.
  • As target date approaches, the fund shifts assets to a more conservative stance.
  • Employers can use these funds as default options in automatic enrollment plans.

“They are very low maintenance, one-stop shopping options,” says Greg Carlson, a fund analyst at Morningstar. “Some people have become overwhelmed by the number of choices out there in the mutual fund arena, and they’ve lost some confidence in their ability to build portfolios as a result of the recent bear market.”

In fact, with few exceptions, most of these funds opened for business during or subsequent to the 2000-2002 bear market in which the stock market contracted by nearly 50 percent.

“After so many fund companies rolled out technology funds at the end of the bull market and at the start of the bear market, they maybe took a step back and realized they needed to offer something more diversified,” says Carlson.

Mind you, the fund industry’s motives had less to do with concern about investor welfare and more to do with growing the business.

“It’s better to have a fund where you’re getting steady inflows rather than sharp inflows and then steep outflows,” Carlson says.

Short track records

Because they’re relative newcomers to the retirement-plan scene, it’s hard to predict what type of performance you can expect over the long run with these funds. And investors who may want to look at how they’re structured — to use as a guide on how to construct their own portfolios, perhaps — will be surprised to see how different they are, one from another.

That means investors are not off the hook from performing due diligence before determining if these funds are right for them.

About 90 percent of target-date funds are “funds of funds,” meaning they contain other mutual funds. For instance, the Vanguard 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.

Foreign 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?

“The 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 underlying portfolios.

Why not cite the omnipresent Fidelity Freedom funds, which command about 50 percent of the market?

“Fidelity’s 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.

Cost 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 challenges.

On the next page is a listing of some of the more popular target-date funds as well as their asset allocation characteristics, according to Morningstar.

Target-date funds from select fund firms
Name Total Return

1 Year

Total Return

3 Year*



Asset Alloc Equity % Asset Alloc Bond % Asset Alloc Cash %
Barclays Global Inv LP 2010 10.04 9.02 0.85 44.68 46.83 8.23
Barclays Global Inv LP 2020 11.62 11.16 0.86 64.28 29.62 5.91
Barclays Global Inv LP 2030 12.79 12.78 0.86 78.75 16.90 4.21
Barclays Global Inv LP 2040 13.72 14.01 0.86 90.67 6.33 2.90
Barclays Global Inv LP Retire 9.50 7.82 0.85 37.22 53.26 9.24
Fidelity Freedom 2000 8.15 6.25 0.52 28.26 42.55 28.05
Fidelity Freedom 2010 10.24 9.15 0.62 50.68 35.87 12.03
Fidelity Freedom 2020 11.43 11.56 0.70 68.37 24.87 5.41
Fidelity Freedom 2030 12.25 12.90 0.74 80.95 14.06 3.91
Fidelity Freedom Income 7.63 5.70 0.51 20.97 47.66 30.12
Fidelity Freedom 2040 12.64 13.52 0.76 83.50 11.84 3.57
Fidelity Freedom 2005 10.15 8.88 0.62 49.24 36.43 12.93
Fidelity Freedom 2015 10.70 10.39 0.67 57.58 31.98 9.04
Fidelity Freedom 2025 11.69 12.06 0.72 70.97 22.75 5.00
Fidelity Freedom 2035 12.41 13.16 0.75 81.42 13.66 3.84
Fidelity Freedom 2045 NA NA 0.79 86.66 9.05 3.26
Fidelity Freedom 2050 NA NA 0.79 88.17 7.71 3.11
T. Rowe Price Ret. 2010 12.45 11.62 0.65 60.57 32.45 5.33
T. Rowe Price Ret. 2020 14.00 13.33 0.72 75.36 18.75 4.39
T. Rowe Price Ret. 2030 14.83 14.79 0.76 85.43 9.09 4.26
T. Rowe Price Ret. 2040 14.97 14.84 0.76 87.09 7.59 4.12
T. Rowe Price Ret. Income 10.04 8.67 0.56 40.22 48.95 9.37
T. Rowe Price Ret. 2005 11.38 10.45 0.61 51.38 40.81 6.10
T. Rowe Price Ret. 2015 13.25 12.44 0.69 68.27 25.52 4.72
T. Rowe Price Ret. 2025 14.57 14.05 0.74 81.13 13.35 4.11
T. Rowe Price Ret. 2035 14.91 14.81 0.76 87.10 7.57 4.14
T. Rowe Price Ret. 2045 14.81 NA 0.76 87.13 7.63 4.05
Vanguard Target Ret. 2005 11.24 7.78 0.21 43.68 53.81 2.29
Vanguard Target Ret. 2015 12.88 9.92 0.21 63.10 35.84 0.75
Vanguard Target Ret. 2025 14.21 11.22 0.21 78.45 20.45 0.71
Vanguard Target Ret. 2035 14.81 12.91 0.21 88.98 9.89 0.69
Vanguard Target Ret. 2045 14.53 13.71 0.21 88.81 9.94 0.81
Vanguard Target Ret. Income 9.65 6.64 0.21 29.76 64.16 5.94
Vanguard Target Ret. 2010 NA NA 0.20 54.21 44.63 0.90
Vanguard Target Ret. 2020 NA NA 0.20 70.74 28.18 0.74
Vanguard Target Ret. 2030 NA NA 0.21 85.68 12.93 0.98
Vanguard Target Ret. 2040 NA NA 0.21 88.48 9.93 1.16
Vanguard Target Ret. 2050 NA NA 0.21 88.46 9.93 1.17
Standard & Poor’s 500 15.24 12.25 NA 100.00 NA NA

* Three-year returns are annualized.

Source: ©Morningstar, Inc. (Data through 4/30/2007.) Morningstar makes every effort to ensure accuracy of this data, but cannot guarantee completeness and accuracy.