When Target-Date Funds Miss the Mark

Even more surprising: This holds true even for the fundholders who are retiring soon. You would expect all "2010" funds to be playing it safe. The reality? The T. Rowe Price 2010 fund (TRRAX) is up 37% over the past three years. The one from Wells Fargo (WFOCX) is up less than half as much: just 16%.

What's going on?

In fact, these are fairly different funds trying to do different things. Both Wells Fargo and American Independence defended their funds' performance, pointing out that these are meant to be very conservative investment vehicles. That means fewer stocks, more bonds. It also means, depending on the firm, little or no exposure to riskier asset classes such as international equities, emerging markets and high-yield bonds.

As a result, you would expect these funds to fall behind their competitors when markets are rising, as they have for the past few years, but to prove much safer investments if things turn volatile. (Wells Fargo also pointed out their funds were "relaunched" a year ago. American Independence says it will be making some changes next month.)

Eric Rubin, president of American Independence funds, said his NestEgg funds are designed to be an appropriate "default option" in a company's 401(k) plan. Right now, he notes, the default option is often a money-market fund. That means low returns and virtually no risk. Rubin argues his funds offer much better long-term returns for minimal extra risk.