When Target-Date Funds Miss the Mark

On the surface, so-called target-date mutual funds sound like a great idea. You name the date you plan to retire and select the appropriate fund.

That, in theory, is your only decision. Just invest regularly in that one fund, and it does all the rest -- magically rebalancing itself until retirement day.

So much for theory.

In practice, these retirement funds aren't always what they seem. You may believe you're getting a "one-decision" fund. But because no two funds are alike, it's hard to know what's been decided. Fund companies have been rolling out a greater number of target-date mutual funds lately, with many of them ending up in 401(k) plans.

Imagine two people who work at adjacent desks, and both plan to retire in 2030. Three years ago, one of them put $10,000 into the T. Rowe Price 2030 Retirement fund (TRRCX). Today, she's pretty happy. That money has already grown to nearly $15,000. The T. Rowe Price fund is a top performer in that period, earning 14.36% a year.

Her colleague also put $10,000 into a 2030 retirement fund three years ago, but she chose the 2030 NestEgg fund (NEHPX) run by American Independence funds. Today, she's got just $13,000 -- almost $2,000 less.

This isn't an isolated case. Look at the performance data tracked by Lipper, and something surprising jumps out. Target-date funds are all over the place. So far this year alone, some year-2030 funds are up 10.3% while others are up a paltry 4.7%.