Expense Watch
Carlson says costs can also be an issue with life-cycle funds. While Vanguard's index-based products charge fees around 0.25%, Wells Fargo has products that charge as much as 1.25%.
"For a fund investing in stocks and bonds, that's somewhat on the high side," Carlson says.
"These are designed to be held for decades, so the higher costs will really cut into your holdings."
Altfest says you're paying more for convenience, which is not necessarily a bad thing. "People go to
McDonald's (MCD Quote - Cramer on MCD - Stock Picks) knowing they can get a better quality and better tasting burger somewhere else, but they want the ease."
Know Thy Master
Asset allocation for the same target date varies from company to company, and there are philosophical differences when it comes to how much of the fund should be based in stocks instead of other asset classes.
In order to choose a fund that matches their investment personality and risk tolerance, investors have to know what the asset allocation is and how it changes over time.
Since these funds offer diversification across a broad range of stocks and bonds, the fund companies need to have a pretty broad-based expertise in order for the funds to be attractive.
Not every shop has that breadth of fund offerings, which is one reason why life-cycle funds have come from big names like Fidelity and Vanguard. If smaller companies start to roll out life-cycle funds, they should be carefully checked to make sure that their existing funds cover a lot of fund styles and that they've performed relatively well.
"People are talking about target-date funds because it is a timely story ... but a vast majority of these products are less than three years old. They're a growing presence in 401(k) plans, but we can't truly judge their performance yet," says Carlson.
Katie Benner
RSS
