Target-Date Trip-Ups

Substantial 401(k) money is moving into "target-date" or "life-cycle" funds, Wall Street's answer to one-stop investment shopping.

In fact, according to Hewitt Associates, a human resources and benefits specialist, some $310 million of 401(k) money moved into these funds during the third quarter -- the highest net inflows of any types of fund for the period.

As of recent count, there are now 155 target-date funds. These funds are investment vehicles that gradually reduce your exposure in equities and increase your exposure in bonds or cash as you near a particular retirement date. You don't have to do anything to reallocate.

They're convenient. They're simple. But they don't all operate in the same fashion.

Here's the thing to remember: One target-date product is not the same as another, even if it's set up for the same time frame.

As with all funds that come under a certain umbrella, there is often considerable variety in the content, diversification, and risk/reward of these funds.

Let's compare the allocations, expenses and returns of several funds that have the same target dates. First, let's look at funds for younger workers, those with a 2040 target.

All of these funds have one thing in common. They give investors having 20 years or more until retirement, or target date, hefty exposure in equities. The average allocation into equities for all 2040 target-date funds is about 86%, according to Morningstar.

However, as you can tell from the table below, the specific amount of equity exposure varies greatly from one fund to the next. And the underlying equity and bond content can also be very different.

As a general rule of thumb, most target-date funds allocate your money between other stock and bond funds within the same fund family. For example, Fidelity's (FFFFX Quote)Freedom 2040 fund puts approximately 11% of your money into the (FGRIX Quote)Fidelity Growth & Income fund, 10% or so into the (FDEQX Quote)Fidelity Disciplined Equity fund, another 10% into the (FEQIX Quote)Fidelity Equity-Income fund and so forth.

Target-Date Funds for Younger Workers
2040	Fidelity FFFFX	Schwab SWERX	T. Rowe Price TRRDX	TIAA-CREF TCLOX
Total in Stock	83.40%	78.50%	89.00%	78.20%
Non-U.S. Stock	20.20%	19.00%	20.20%	13.60%
Expense Ratio	0.76%	0.99%	0.76%	0.61%
12-Month Return	14.51%	15.05%	16.05%	13.24%
Data as of Nov. 10 Source: Morningstar